Investigating The Responses of Private Sector Credit, Output And Prices To Monetary Policy Shocks in Ghana

ABSTRACT 

This study investigates the responses of private sector credit (PSC), output (RGDP) and prices (CPI) to monetary policy shocks in Ghana. The study adopted the technique of Vector Autoregression (VAR) using monthly data from 1990 to 2015. A base VAR was first estimated which comprised of RGDP, CPI, PSC and 91-day Treasury bill rate. Shocks to the Treasury bill rate were identified as monetary policy shocks. The base VAR was then extended to include money supply, exchange rate and price of crude oil, one at a time to assess their individual impact on variables of the base VAR. Cholesky ordered impulse response functions and variance decomposition, as well as Granger Causality tests were used to study the dynamic responses of the variables in our models. The study found that output and private sector credit responded negatively to monetary policy shocks as expected. Prices rose for about four months before falling. Overall, taking in consideration the results from the impulse response functions, variance decomposition and Granger causality tests, our study found that monetary policy is somewhat effective in impacting prices, output and private sector credit in Ghana. The study also found that PSC, RGDP and CPI responded differently to monetary policy shocks in the pre and post inflation targeting regimes, with monetary policy shocks significantly affecting PSC, RGDP and CPI in the latter regime. In the extended models, money supply was found to significantly account for the fluctuations in prices, while PSC outperforms money in forecasting output. Exchange rate was also found to be a moderate conduit for price changes. This study therefore recommends that the monetary authorities ensure that market interest rates at all times reflect the changes in the monetary policy interest rate. This will lead to better response of goal variables. It is also recommended that both the fiscal and monetary authorities ensure that private sector’s credit needs are met.