Estimated DSGE Model for Macroeconomic Analysis in a Small-Open Economy: A Ghanaian Perspective

26 Pages Posted: 24 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

Date Written: February 28, 2020

Abstract

The study develops a standard representative-agents’ New Keynesian model for macroeconomic analysis in a developing African economy. Using Bayesian estimation techniques and Ghanaian dataset, the core objective of the paper is to determine the best suited monetary policy rule for Ghana. After determining the most appropriate monetary policy rule for Ghana, the model is then used to ascertain the dominant macroeconomic shocks to inflation, output and interest rate. The basic finding is that a forward-looking Taylor rule - where authority reacts to one-period-ahead inflation deviation from target alongside current output gap - is the most appropriate monetary policy rule for Ghana. In addition, variations in output are mainly driven by price markup, labour supply, monetary policy and productivity shocks across the forecast horizons. This suggests that monetary policy still matters for output growth in Ghana in the short-to-long run. The dominant determinants of inflation are exchange rate risk premium and price mark-up shocks. The dominant drivers of domestic interest rate are price mark-up, domestic monetary policy and government spending shocks are across forest horizon. By implication, upholding exchange rate stability alongside fiscal prudence is very critical for achieving the broad macroeconomic objectivities in Ghana.

Keywords: Monetary Policy, New Keynesian, DSGE Model, Bayesian Estimation, Posterior, Marginal Likelihood, Metropolis-Hastings, Ghana

JEL Classification: B41, C5, C11, D11, D21, D41, D42, E2, E12, E43, E52, E58, F31, F41

Suggested Citation

Akosah, Nana Kwame, Estimated DSGE Model for Macroeconomic Analysis in a Small-Open Economy: A Ghanaian Perspective (February 28, 2020). Available at SSRN: https://ssrn.com/abstract=3709360 or http://dx.doi.org/10.2139/ssrn.3709360

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

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