Has Inflation Targeting Strategy Made A Difference in Ghanaian Macroeconomic Management? Analysis of Business Cycle Fluctuations and Econometric Estimates

Abstract

For over a decade of practicing inflation targeting (IT) strategy, inflation has remained high and persistent while economic growth momentum has boosted in Ghana. This paper investigates the relative macroeconomic benefits of the IT strategy in Ghana based on business cycle fluctuations and several standard econometric techniques that capture other salient macroeconomic events and/or disasters. The basic empirical finding is that the IT strategy has generally improved the macroeconomic management in Ghana by reducing average inflation rate, boosting average growth rate and dampening the cyclical oscillations in both output and inflation. We however find a slower pace of disinflation in Ghana, underpinning the high inflation inertia and backward-looking inflation expectation formation. The gradual disinflation process is an attestation that the monetary authority in Ghana has been practicing flexible rather than stringent IT strategy in the midst of frequent shock-side shocks, weak policy transmission (due to protracted transmission lags) and continuous fiscal surprises which create additional source of concerns that the central bank finds it cumbersome to ignore. The central bank of Ghana can improve its policy credibility and hence sharp agents’ inflation expectation by enhancing policy communication and acknowledging that it does not focus solely on the inflation target but is also watchful of short-run trade-offs between inflation and output (and employment).