Has Inflation Targeting Strategy Made A Difference in Ghanaian Macroeconomic Management? Analysis of Business Cycle Fluctuations and Econometric Estimates

The 4th Session of the Peer-to-Peer Research Seminar Series, African Training Institute (ATI), IMF, 2020

29 Pages Posted: 21 Nov 2020

See all articles by Nana Kwame Akosah

Nana Kwame Akosah

Research Department, Bank of Ghana; University of the Witwatersrand, Wits Business School, Students

Imhotep Paul Alagidede

University of the Witwatersrand

Eric Schaling

University of the Witwatersrand

Date Written: October 2020

Abstract

For over a decade of practicing inflation targeting (IT) strategy, inflation has remained high and persistent while economic growth momentum has boosted in Ghana. This paper investigates the relative macroeconomic benefits of the IT strategy in Ghana based on business cycle fluctuations and several standard econometric techniques that capture other salient macroeconomic events and/or disasters. The basic empirical finding is that the IT strategy has generally improved the macroeconomic management in Ghana by reducing average inflation rate, boosting average growth rate and dampening the cyclical oscillations in both output and inflation. We however find a slower pace of disinflation in Ghana, underpinning the high inflation inertia and backward-looking inflation expectation formation. The gradual disinflation process is an attestation that the monetary authority in Ghana has been practicing flexible rather than stringent IT strategy in the midst of frequent shock-side shocks, weak policy transmission (due to protracted transmission lags) and continuous fiscal surprises which create additional source of concerns that the central bank finds it cumbersome to ignore. The central bank of Ghana can improve its policy credibility and hence sharp agents’ inflation expectation by enhancing policy communication and acknowledging that it does not focus solely on the inflation target but is also watchful of short-run trade-offs between inflation and output (and employment).

Keywords: Monetary Policy, Business Cycle, Pro-cyclical, Counter-cyclical, Expansion, Contraction, Amplitude, Inflation Targeting, Ghana

JEL Classification: E20, E31 E32 E42, E43, E52, E58, E62, F31

Suggested Citation

Akosah, Nana Kwame and Paul Alagidede, Imhotep and Schaling, Eric, Has Inflation Targeting Strategy Made A Difference in Ghanaian Macroeconomic Management? Analysis of Business Cycle Fluctuations and Econometric Estimates (October 2020). The 4th Session of the Peer-to-Peer Research Seminar Series, African Training Institute (ATI), IMF, 2020, Available at SSRN: https://ssrn.com/abstract=3704720 or http://dx.doi.org/10.2139/ssrn.3704720

Nana Kwame Akosah (Contact Author)

Research Department, Bank of Ghana ( email )

P.O. Box GP 2674
One Thorpe Road
Accra
Ghana
+233 267801235 (Phone)

University of the Witwatersrand, Wits Business School, Students ( email )

Johannesburg
South Africa

Imhotep Paul Alagidede

University of the Witwatersrand ( email )

1 Jan Smuts Avenue
Johannesburg, GA Gauteng 2000
South Africa

Eric Schaling

University of the Witwatersrand ( email )

1 Jan Smuts Avenue
Johannesburg, GA Gauteng 2000
South Africa

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