Does Monetary Policy Action Have Significant Impact on the Real Economy? A Critical Look at the Aggregate Demand Function for Ghana

19 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: December 29, 2017

Abstract

This paper examines the impact of monetary policy on real economic activities using a modified open-economy New Keynesian aggregate demand function for Ghana over the period 2000Q1-2016Q4. Our analysis shows that all the determinants of aggregate demand have the expected theoretical signs. We observed that tighter monetary policy dampens economic activities in Ghana, as the elasticity of domestic output gap to changes in real monetary condition index – which is a combination of real exchange rate and interest rate gaps - were all negative and significant. The results also show that lag and lead domestic output gap, foreign output gap and structural fiscal gap have positive impact on current output gap. In particular, the weight of real exchange rate in the output gap equation appears to outweigh that of real interest rate and lagged output gap in the case of Ghana. This accentuates the relevance of real exchange rate in Ghana's monetary policy transmission mechanism.

Keywords: New Keynesian Model, Monetary Policy, Real Monetary Condition Index, Aggregate Demand, Generalized Methods of Moments, Ghana.

JEL Classification: C2, E1, E31, E58

Suggested Citation

Akosah, Nana Kwame, Does Monetary Policy Action Have Significant Impact on the Real Economy? A Critical Look at the Aggregate Demand Function for Ghana (December 29, 2017). Available at SSRN: https://ssrn.com/abstract=3709445 or http://dx.doi.org/10.2139/ssrn.3709445

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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