Are Monetary Policy Disturbances Important in Ghana? Some Evidence from Agnostic Identification

This paper investigated whether monetary policy disturbances matter in Ghana. A previous study pursued this question but the evidence brought forth was plagued with the exchange rate and price puzzles. We argued, in this paper that these puzzles arise because of identification scheme of the kind utilized in that paper. We showed that a better approach to overcoming these puzzles is by using the agnostic identification scheme. Using a quarterly time series over the 1990Q1 – 2015Q3, and an efficient algorithm for solving sign restricted SVARs, we found that short-term interest rate responded largely and positively, real output and consumer prices reacted negatively, nominal exchange rate reacted by appreciating after just 2 quarters, and dropped gradually to its baseline, and monetary base and commodity prices reacted by dropping below zero and remained there, following a contractionary monetary policy disturbance. The reaction of nominal exchange rate is rather lethargic, taking into account the strong rise in the short-term interest rate, pointing to: some existing structural and institutional rigidities in the Ghanaian economy that inhibit the size of capital inflows expected, the country’s dismal sovereign bond rating, or the increase in the short-term interest rate is not high enough to mitigate the cost of capital investment.