Monetary Policy and Private Sector Credit Interaction in Ghana

Alice Constance Mensah* and Ebenezer Okyere
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Alice Constance Mensah*: Mathematics and Statistics Department, Accra Technical University, P.O. Box 561, Accra, Ghana
Ebenezer Okyere: Banking Supervision Department, Bank of Ghana, Cedi House, Ghana

International Journal of Economics and Financial Research, 2020, vol. 6, issue 7, 180-191

Abstract: Using a series of econometric techniques, the study analysed interaction between monetary policy and private sector credit in Ghana. This study made use of monthly dataset spanning January 1999 to December 2019 of credit to the private sector (PSC) and broad money supply (M2). The results reveal that there exists cointegration, a long run stationary relation between monetary policy and private sector credit. This implies, increases in credit should prompt long-term increases in monetary policy. It is not surprising that growth in the private sector might have a stronger effect on monetary policy. The Error Correction Test is statistically significant and that all the variables demonstrate similar adjustment speeds. This implies that in the short run, both money supply and credit are somewhat equally responsive to their last period’s equilibrium error. There is unidirectional causation from private sector credit to monetary policy. It can be said that, there is an interaction between money supply and private sector credit. Thus, credit to private sector holds great potential in promoting economic growth. It can be recommended to the government to increase the credit flow to the private sector because of its strategic importance in creating and generating growth of the economy.

Keywords: Monetary policy; Private sector; Credit; Developing economy; VECM (search for similar items in EconPapers)
Date: 2020
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