Effectiveness of Inflation and Monetary Targeting Frameworks in Ghana: A Comparative VAR Analysis

Abstract

This paper compares the effectiveness of the inflation targeting and monetary targeting frameworks adopted by the Bank of Ghana (BOG) as key tools of controlling inflations as it key policy objective. Vector error correction models (VECM) are estimated separately for each policy regime, allowing a richer set of monetary policy-relevant variables to be incorporated while mitigating the over-parameterisation problems associated with standard VAR specifications (Taylor, 2001). For the inflation targeting regime, the results indicate long-run causality running from the BOG Monetary Policy Rate (MPR) to the nominal inflation rate. The impulse response functions show a strong short-run response of inflation, commercial bank deposit rates, and bank lending rates to policy-induced shocks in the MPR; this response weakens after approximately six months. For the monetary targeting regime, the results indicate long-run causality running from the BOG Treasury Security Rate, with impulse responses showing significant effects of policy-induced open market operations on GDP growth, inflation, and credit supply from banks, the latter becoming significant by the third quarter following the shock. The findings support long-run transmission through both channels, providing an institutional rationale for the BOG’s continued use of a dual policy framework in Ghana.