The effect of central bank credibility on economic growth and output volatility in inflation targeting regime

Mark K. Armah ()
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Mark K. Armah: University of Cape Coast

Journal of Social and Economic Development, 2024, vol. 26, issue 2, No 13, 619-640

Abstract: Abstract Against the backdrop that inflation targeting is adopted to achieve a stable macroeconomy (i.e. achieve single-digit inflation rates, lock-in of inflation expectations, and the capacity to deal with demand shocks and financial crises), we analyse the credibility of the Ghanaian and South African Central Banks in achieving target inflation rates. Further, we test the extent to which foreign direct investment, trade openness, and exchange rate volatility moderate the effect of central bank credibility on economic growth and output volatility in Ghana and South Africa. Using the GMM estimation technique, we find robust evidence that weakened central bank credibility is directly inimical to economic growth in both countries but more pronounced in South Africa. Further, the evidence suggests that although missing inflation target triggers output volatility in both countries, the effect is remarkable in the case of South Africa. Additionally, the study reveals that while trade openness and FDI nullify the harmful effect of missed inflation target on economic growth in South Africa, that effect proves elusive in the case of Ghana. We provide recommendations in the light of the weak economic prospects and the projected rise in financial globalisation of both countries following the implementation of the African Continental Free Trade Area.

Keywords: Economic growth; Exchange rate volatility; Central bank credibility; FDI; Inflation targeting; GMM; Output volatility (search for similar items in EconPapers)
JEL-codes: E02 E5 F35 F4 F62 O55 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s40847-023-00274-9

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