Is monetary policy effective in dampening fiscally induced exchange market pressures? Evidence from Ghana

Nana Akosah () and Julius Berry Dasah

Macroeconomics and Finance in Emerging Market Economies, 2016, vol. 9, issue 2, 148-166

Abstract: Episodes of currency crises in Ghana over the recent past were examined. We also address two fundamental questions using VAR framework. First, how does fiscal policy relate to exchange market pressures (EMPs) in Ghana? Second, whether persistent fiscal slippages hinder the effective use of interest rate as monetary policy tool to influence undesirable exchange rate fluctuations? We found sterilization interventions to be more effective than interest rate as a monetary policy tool in moderating tensions in foreign exchange market. Higher recurrent expenditure was generally associated with higher EMP, while capital expenditures tend to assuage EMP. We recommend strong policy coordination between the fiscal and monetary authorities to ensure macroeconomic stability.

Date: 2016
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DOI: 10.1080/17520843.2015.1077874

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