American Journal of Economics and Business Administration

Monetary Policy in a Markov-Switching VECM: Implications for the Cost of Disinflation in Ghana

Richard Kwabi Ayisi and Joseph Adu

DOI : 10.3844/ajebasp.2016.53.61

American Journal of Economics and Business Administration

Volume 8, Issue 2

Pages 53-61

Abstract

Monetary policy assessment in Ghana has been conducted using vector auto-regression. This however, presumes stability of long run outcomes and particularly ignores monetary policy regime changes that has characterized the economy overtime. This study thus introduced the possibility of switches in the long run equilibrium in co-integrated vector auto-regression by allowing both the covariance and weighting matrix in the error-correction term to switch. The study did not find any significant difference in monetary response in the different states. However, significant difference was obtained for the cost of disinflation across states. Though, disinflation cost has declined as the Bank of Ghana shifts from monetary targeting to inflation-targeting regime, overall cost is still high. This has implication on disinflation policy given the development agenda pursue by the country.

Copyright

© 2016 Richard Kwabi Ayisi and Joseph Adu. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.