The Relationship Between Policy Rates and Domestic Debt in Ghana

Abstract

The principal purpose of this study is to investigate the relationship between policy rates and domestic debt in Ghana. Utilizing a time series data, the study adopted the Vector Error Correction Model (VECM) for result analysis. Over the long run, domestic debt was found to have a negative impact on monetary policy rate, with the reverse observed for the short run. However, both models yielded statistically insignificant results. Nevertheless, the study revealed a statistically significant relationship between inflation and real GDP with the monetary policy rate in the long run, indicating a positive and negative impact, respectively. In the short run, only inflation was found to be statistically significant. The study's findings and analysis were found to be reliable as there was no evidence of serial correlation or heteroskedasticity in the model. In the end, the study was able to address a crucial gap in the literature on public debt by primarily investigating the influence of domestic debt on monetary policy rate in Ghana.