The Effect of Monetary Policy on Price Stability and Gross Domestic Product in Ghana

Abstract

This study examined the effects of monetary policy on price stability and gross domestic product (GDP) in Ghana using a predictive data analytical model adapted from Friedman's (1982) models. Monetary policy adopted a two-target framework based on both the policy interest rate target and the bank credit aggregate target. Hypotheses tests were conducted using Vector Auto-Regressions (VARs) and Multiple Regression Analyses using secondary data. The VAR tests produced a statistically weak relationship between both price stability and real GDP and the two-target monetary policy framework. The results from the multiple regression analyses, however, indicated statistically significant relationships between the price stability and interest rate targets and those of real GDP and bank credit aggregate targets, thus confirming the model’s predictive capability. The study therefore recommends that for the achievement of price stability and the expansion of real GDP simultaneously, a two-target framework of monetary policy be implemented in Ghana.