Monetary policy credibility and macrodynamics: evidence from Ghana

Abstract

ABSTRACTWe compute a time-varying metric of monetary policy credibility based on Ghana’s experience, using both symmetric and asymmetric approaches. We then follow-up with some empirical evidence to address the linkages between macroeconomic developments and central bank credibility. The empirical results reveal high and low credibility cycles with an average duration of 2 years over the study period. Particularly, higher levels of credibility were associated with stable domestic currency and lower nominal interest rates. This reinforces the notion that efficient monetary policy delivers higher central bank credibility with better outcomes for macroeconomic variables. In contrast, the level of credibility tends to worsen in the wake of weakening macro fundamentals which are not adequately countered by monetary policy decisions. There is therefore the need for efficient monetary policy formulation to achieve a stable macroeconomic environment in Ghana. This will in the long-run build policy credibility towards attaining the central bank’s medium-term inflation target.