Central bank policy formulation under COVID-19 in Ghana: A fit-for-purpose?

What is it about?

This paper evaluates the fit-for-purpose of the monetary policy measures implemented by the Bank of Ghana in response to the COVID-19 pandemic. We examine the effectiveness of the BoG’s policy interventions in the context of vector autoregressions augmented with macroeconomic and financial indicators. We demonstrate that the BoG’s monetary policy measures have had nominal, real, and financial effects. The monetary interventions have been successful, as evidenced by the gradual reduction in the sovereign spread, improved financial stability, and increased real economic activity. Our findings suggest that balance sheet actions are less effective and should be moderated in the conduct of monetary policy in jurisdictions without zero lower bound constraints. However, the analysis indicates that in times of crisis, central banks should deploy both standard and non-standard tools to stabilize dysfunctional financial markets and avoid a deflationary spiral. The historical and variance decomposition of the data reveal that monetary policy shocks have historically made the largest contributions to the targeted macro-financial aggregates during the pandemic episodes.

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Why is it important?

Despite several common threads in central bank actions in response to the pandemic, the idiosyncrasies of each economy and institution determined the specific actions of each central bank. Against this backdrop, a country-focused analysis would draw out specific implications for the future conduct of monetary policy. This paper evaluates the magnitudes of monetary policy tools deployed in Ghana and assesses the impacts of the central bank's actions. The paper contributes to the emerging literature on the "recession playbook" (as discussed, for example, in Bernanke 2020) since the Great Financial Crisis (GFC). The study focuses on a frontier economy characterized by relatively low financial development and potentially restricted monetary transmissions, comparing the results with observations from advanced economies. Thus, this study helps to determine whether the stylized facts about the "recession playbook"4 are portable across countries. Furthermore, the study contributes to determining monetary policy options and policy mix available to central banks in times of adverse external shocks as they attempt to contain and recover from economic crises. The paper also sheds light on the use of the central bank toolkit in response to overlapping challenges and rapid economic deterioration in an environment without the zero lower bound (ZLB) constraint but with mounting debt challenges.

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