HOW OPTIMAL IS GHANA'S SINGLE-DIGIT INFLATION TARGETING? AN ASSESSMENT OF MONETARY POLICY EFFECTIVENESS IN GHANA

ABSTRACT

High and rising inflation is not good news with a resultant general dislike for it. Indeed, Inflation has very significant effects on the economy and the welfare of the population. It is generally accepted that when inflation is too high it has detrimental effects such as wiping away savings and even redistributing incomes among others. However, when it is too low too it could discourage the investments required to propel economic growth and increase welfare. Monetary policy has been the main tool used to fight inflation and policymakers have over the years sought to find that ideal inflation rate which could balance tradeoffs that exist between inflation and other critical macroeconomic variables to promote welfare.

Likewise, the Bank of Ghana has declared that a Single-Digit Inflation target over the medium term is ideal for the economy of Ghana. For that matter, this study employed data such as Per Capita GDP, Gross Capital Formation, Broad Money, and Inflation spanning the period 1965 to 2019 to estimate optimal inflation for Ghana and assess whether the single-digit inflation target by the Bank of Ghana, which is its monetary policy objective is indeed optimal.

This study employs two different econometric methods i.e. Autoregressive Distributed Lag (ARDL) and Threshold Regression Models both of which were corroborative in the results. The study estimated a range of 5 – 7 percent inflation as the optimal inflation for Ghana, thereby confirming the Single-Digit Inflation targeting by the Bank of Ghana as optimal. Based on this finding, the study goes on to urge the central bank to continue pursuing its single-digit inflation targeting. Again, the Central Bank should commit to increased transparency in terms of its policymaking to bring stakeholders on board to help it achieve the goal.