Inflation targeting policy, real exchange rate, exports and imports nexus in Ghana (1984 – 2019)

Abstract

Inflation Targeting (IT) Strategy has been adopted widely by both developing and developed countries as a tool of monetary policy. Bank of Ghana (BoG) formally adopted Inflation targeting Policy in 2007, making Ghana the second sub Saharan African country to do so. This study sought to analyze empirically the effectiveness of IT policy on Exchange Rate, Exports and Imports by employing annual time series data from 1984 - 2019. The dataset was divided into periods before the adoption of IT (1984 – 2006) and after Inflation Targeting (2007 – 2019) in order to analyze the effect of IT on the selected variables. A dummy variable capturing the periods before and after the adoption of IT was employed. This study used Vector Autoregressive model to analyze the time series data on Exchange Rate, Exports and Imports. The results indicate that IT has a negative and statistically significant effect on Exchange rate. Also, the results show that Inflation Targeting has a positive but statistically insignificant effect on export in Ghana. Finally, the results revealed that Inflation Targeting has a negative but statistically insignificant effect on imports. The study therefore recommends that Bank of Ghana adopts policy measures towards stabilization of the exchange rates so that level of imports can be controlled and exports encouraged. Also, the study recommends that government implement policies that are directed towards the patronization of locally produced goods so as to improve our trade balance.