Monetary policy, institutional quality and economic growth in Ghana

Abstract

The study was aimed at investigating the relationship between Monetary Policy,Institutional Quality and Economic Growth in Ghana. More specifically, the study aimed at examining the long run and short run impact of Monetary policy on economic growth in Ghana and as well test the causal relationship between monetary policy and economic growth in Ghana. The data period was 1980 to 2022 on annual basis. The study adopted both (ARDL) and the Granger Causality Test for the estimations. The study found that there exist a long run association between Monetary policy, rule of law, control of corruption, regulatory quality and economic growth in Ghana. Money Supply has a positive significant impact on economic growth, Monetary policy rate had an insignificant impact on economic growth however, in the short run, Monetary Policy Rate had a negative significant impact on economic growth in Ghana. The estimated tests reveal joint relationship among the variables. The findings of the estimated linear model shows that economic growth responds positively to monetary policy whist control of corruption and regulatory quality are inversely related to monetary policy with rule of law being and statistically significant, thus, suggesting that, economic growth is susceptive to changes in institutional quality while effective monetary policy exert positive and insignificant effect on economic growth. In addition, the results reveal that economic growth is engendered by the variables of monetary policy and economic growth. Finally, on the granger causality test, the study suggested that Economic growth granger causes monetary policy without a feedback effect hence a unidirectional causality. In view of this, consistent, prudent and effective monetary policies and measured institutional quality will aid to grow the Ghanaian economy through Money Supply in the long run, and both Money Supply and Monetary Policy Rate in the short run.