Monetary Policy in Ghana: Are Domestic Decisions Still Independent?

This study investigates the evolving nature of monetary policy independence in Ghana using a frequency-based Time-Varying Parameter Vector Autoregressive (TVP-VAR) model to analyse the connectedness among key macroeconomic and external variables. The study utilised a monthly data spanning from January 2011 to December 2024. The findings reveal a mild to low degree of interdependence within the system, with shocks propagating more in the short term. A critical finding was that the monetary policy rate, contrary to its conventional role, acts as a net receiver of shocks rather than a net transmitter. The reactive behaviour, while aligned with the theoretical framework of the Taylor Rule, underscores a significant constraint on the Bank of Ghana’s autonomy. The policy rate is found to be predominantly influenced by domestic factors, such as persistent inflation and exchange rate volatility. The implications are substantial, the central bank's ability to proactively steer the economy and maintain price stability is undermined by these economic forces. This study recommends that policymakers enhance forward-looking communication, pursue coordinated fiscal and monetary policies, and develop robust macroprudential tools to bolster central bank independence and improve macroeconomic stability.