Njie-Ma, Alasana (2018) Monetary transmission mechanism and monetary policy in Ghana : the roles of the financial system and external openness. (PhD thesis), Kingston University, .
Abstract
This thesis assessed the hypothesis that the financial system and external openness were significant determinants of the post reform dynamics of the monetary transmission mechanism in Ghana, and the evolution in the Bank of Ghana's post reform monetary policy programming. Ghana underwent structural adjustment reform, which began in the mid 1980s. The reform was arguably the most significant structural reform programmed in its post-independence history, as it was designed to engender a shift from the pre-reform import substitution macroeconomic framework to a post reform liberalised, open economy. The reform motivated long term structural changes in key sectors of the economy, potentially including monetary transmission mechanism and monetary policy. Key aspects of the reform programme included; (1) financial structure reforms and financial sector liberalisation, (2) External openness liberalisation and (3) Monetary policy reforms. Theoretical consensus, as evidenced in the Post Keynesian and Open Economic conceptualisations, is that the nature and dynamics of the monetary transmission mechanism is determined by, amongst other factors, the institutional structure of the financial system and external openness. These theories further postulate that a Central bank's choice of, and effectiveness of its monetary policy framework(s) and policy tools, are determined by the structure and dynamics of the monetary transmission mechanism. By extension, a significant determinant of a Central bank's choice of policy frameworks and tools is the nature and dynamics of the financial system. The theoretical implications are that institutional and structural changes in a country's financial system and external openness will have long run implications for the dynamics of the monetary transmission mechanism, and well as motivate changes in a central bank's monetary policy frameworks and tools. This thesis tests these theoretical implication using Ghana's experience with the structural adjustment reforms as an event study. Firstly, the thesis tested the hypothesis that institutional and structural changes in financial structure and external openness were significant in explaining the long run dynamics of the monetary transmission mechanism in Ghana. To test this hypothesis, we first constructed a financial structure and external openness indices using Dynamic Factor Modelling techniques. Then a benchmark model and an augmented model are constructed and estimated. The structural dynamics of the monetary transmission mechanism is assessed using three tests; (a) significance of long run and short run causality running from monetary policy to the admissible variable, (b) significance structural change by conducting a structural break test (using likelihood ration test) on the augmented model and, (c) assessment of impulse responses of shocks in the financial structure and external openness indices. Secondly, in light of the institutionalised market based reforms of the financial system, the thesis also tested the hypothesis that this was significant in evolution to indirect monetary targeting and inflation targeting tools. Vector Autoregressive (VAR) models of the Bank of Ghana's inflation targeting and monetary targeting frameworks are estimated. Effectiveness of both policy tools are assessed by analysing causality (short run and long run) running from both policy tools (monetary policy rate and open market operations). In addition, responses to policy induced shocks in the Bank of Ghana's Monetary Policy Rate, and Open Market Operations are also assessed using Impulse Response Function (IRF) analysis. The overall empirical findings indicate that the structural adjustment reform, and the underlying financial system and external openness changes, were significant in the post reform dynamics of monetary transmission mechanism and monetary policy in Ghana. Both the banking sector and the post reform external openness had significant effects on GDP growth and inflation, indicating their important roles as systematic links between monetary policy and the post reform macroeconomy. The findings also suggest that development post reform financial structure motivated the observed post reform regime transitions in the Bank of Ghana's monetary policy frameworks from the direct regime to indirect institutionalised monetary targeting and inflation targeting regimes.
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