Ghana: Monetary targeting and economic development

The policy of credit ceilings coupled with the use of imposed velocity in monetary management in Ghana was fraught with failures and undesirable effects during the decade of economic reform (1983–1992). The failures necessitated the removal of credit ceilings and the adoption of indirect control of money supply. An important requirement for monetary management using an indirect control is the determination of the absorptive capacity of the economy as well as the identification of the appropriate intermediate targets, operating variables and policy instruments. An ideal policy instrument is one that can be precisely measured, is achievable by the monetary authorities within a short period of time, serves as a visible signal regarding intent of policy to economic agents, and is related to intermediate targets. This paper proposes a financial programming model (encompassing both demand and supply of money) that may be used to target growth in monetary stock, identify the key sources of assets and forecast the portfolio of the corresponding bank liabilities. The major instruments identified include financial papers (Bank of Ghana and government treasury bills and bonds), discount quotas and reserve ratios. These may be supplemented with directives and moral suasion. The leading indicators for determining whether monetary policy is on track include changes in the rate of foreign exchange and the rate of inflation.