Targeting Financial Stability in Ghana: The Role of Monetary Policy and Macroprudential Regulations

Abstract

This paper examines the effect of Ghana’s macroprudential regulations and monetary policy on the nation’s financial stability. It specifically looks at how these policies interact and what effect they have on Ghana’s financial stability. This is done using the Autoregressive Distributed Lag [ARDL] model to evaluate quarterly data from 2013 Q1 to 2022 Q1 provided by the Bank of Ghana [BoG], Ghana Statistical Service [GSS], and World Development Indicators [WDIs]. The results show that macro-level prudential regulations have no long-term association with financial stability but have a favourable and significant short-term effect. Furthermore, the existence of monetary policy boosts the short-term effects of macro-level prudential regulations on financial stability but has no significant long-term influence. The study recommends that immediate concerns about financial stability can be addressed using a coordinated approach that combines macroprudential regulations and monetary policy, while fine-tuned macro-level prudential regulations should be the principal tool for long-term stability preservation. The BoG should prioritise the development and implementation of measures such as the capital adequacy ratio that address systemic risks.