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The Signalling Effect of Monetary Policy Rate on Lending Rates in Ghana

Author

Listed:
  • Lartey, Lawrencia

Abstract

This study was undertaken to determine the pass through effect of the Central bank’s monetary policy rate on commercial banks’ lending rates. Specifically, the study sought to ascertain the short and long run relationship between these variables of interest. It employed monthly time series data spanning from 2002 to 2017 which was sourced mainly from the World Development Indicator (WDI) and Bank of Ghana (BOG). Autoregressive Distributed Lag Model (ARDL) was the estimation technique used for analyzing the data. Estimates from the Augmented Dicker- Fuller (ADF) and Phillips-Perron (PP) unit root test showed that the variables were all integrated of order one (1). The findings found that there is a positive relationship between average lending rates and Monetary Policy Rate (MPR). MPR was significant in both the long and short run and had a large marginal effect on lending rates compared to all the other variables. However, in the short run the speed of adjustment was relatively slow. This implied a more rigid downward adjustment of average lending rate to changes in all the variables. Money supply in the economy denoted by M2+ was negatively related to average lending rates. Treasury bill rate was the only variable which was negatively insignificant in the short run. Based on the above findings the study recommends appropriate measures to be implemented to assist in fully developing the financial markets.

Suggested Citation

  • Lartey, Lawrencia, 2018. "The Signalling Effect of Monetary Policy Rate on Lending Rates in Ghana," MPRA Paper 92244, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:92244
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    References listed on IDEAS

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    1. Abdul Karim, Zulkefly & Wan Ngah, Wan Azman Saini & Abdul Karim, Bakri, 2010. "Bank lending channel of monetary policy: dynamic panel data evidence from Malaysia," MPRA Paper 26157, University Library of Munich, Germany.
    2. Afrin, Sadia, 2017. "Monetary policy transmission in Bangladesh: Exploring the lending channel," Journal of Asian Economics, Elsevier, vol. 49(C), pages 60-80.
    3. Katarzyna Appelt, 2016. "Keynes' Theory of the Interest Rate: A Critical Approach," Theory Methodology Practice (TMP), Faculty of Economics, University of Miskolc, vol. 12(01), pages 3-8.
    4. Joshua Abor & Nicholas Biekpe, 2007. "Small Business Reliance on Bank Financing in Ghana," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 43(4), pages 93-102, August.
    5. Meshach Jesse Aziakpono & Magdalene Kasyoka Wilson, 2015. "Interest Rate Pass-Through, Financial Structure And Monetary Policy In South Africa," The African Finance Journal, Africagrowth Institute, vol. 17(1), pages 67-90.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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