Monetary policy and trade openness in Ghana

Abstract

Monetary policy is one of the key drivers of economic growth in most economies and through its impact on economic variables. The objective of this study is to analyse the effectiveness of monetary policy in Ghana taking into account the role of trade openness and trade policy in influencing the effectiveness of monetary policy. The study employed the co-integration approach with quarterly data from 2002 to 2016 to assess the relationship between trade openness and effectiveness of monetary policy in affecting inflation and output. The empirical result revealed that as the degree of trade openness increases, monetary policy become less effective in reducing the rate of inflation and causes domestic output to decline in the long-term. Though the results of the study confirmed the theoretical relationship between trade openness and inflation and output, the results indicated that when monetary policy is taken into account, negative effect of trade openness on inflation is reduced. The ability of trade openness to reduce inflation level in Ghana is hindered by increases in the monetary policy rate. Thus, the results implies that trade openness hinders monetary policy’s ability to curtail inflation in Ghana whilst it is able to effectively cause output to decline.

Keywords: Monetary Policy, Inflation, Output, Trade Openness, Co-integration