Monetary policy, financial sector and economic growth in Ghana: estimating threshold effect

Abstract

Purpose

The study aims to investigate the role of monetary policy in encouraging economic growth through bank loans, as well as estimating the optimal monetary policy rate (MPR), which may be damaging to Ghana's economic growth if exceeded.

Design/methodology/approach

Using annual data spanning from 1990 to 2017, the authors used Autoregressive Distributed Lag (ARDL) econometric approach to investigate the impact of monetary policy on economic growth. Lind and Mehlum (2010) U test estimation technique is used in determining the threshold level.

Findings

The empirical findings demonstrated that the monetary transmission mechanism through the credit channel is poor in the long run, and the effectiveness of monetary policy is dependent on the financial sector's performance. A non-monotonic relationship between monetary and economic growth was also discovered in the study. As a result, the Monetary Policy Committee (MPC) should not adopt an interest rate for monetary policy that surpasses 23.7%.

Practical implications

Because of the non-monotonic link between MPR and economic growth, it is necessary to expand the financial market and ensure that the policy rate does not exceed the threshold level.

Originality/value

To the best of the authors' knowledge, this is one of the first studies to look at the MPR as a potential source of negative economic growth. The paper's findings could aid the MPC in determining the MPR. A MPR that is too high could eventually damage the financial sector and lead to economic disasters.

Citation

Amoaning, F. and Ahiakpor, F. (2022), "Monetary policy, financial sector and economic growth in Ghana: estimating threshold effect", African Journal of Economic and Management Studies, Vol. 13 No. 4, pp. 668-682. https://doi.org/10.1108/AJEMS-10-2021-0468