Term Paper on "Ghana Many of the Most Renowned Economists"

Term Paper 24 pages (6960 words) Sources: 0

[EXCERPT] . . . .

Ghana

Many of the most renowned economists throughout the world believe that inflation targeting is a monetary tool that should be implemented. The management of inflation is essential to ensuring that the economy will be profitable and sustainable over time. Economies that cannot stabilize inflation rates will have difficulty growing and flourishing over the long run and the quality of life for citizens will suffer. The country of Ghana, located in West Africa, has undergone many changes over the past few decades as a result of gaining its independence. With this new found independence came the need to embrace an effectual monetary policy so that the economy can flourish. Monetary Management by the Central Bank as a major arm of economic policy management in Ghana has by law and practice often focused on price stability. Yet over the years in Ghana, monetary policies implemented by the central bank has had a history of strong inflationary pressures from a triple digit in the early seventies and eighties to double digits in the nineties and is currently battling to attain single digit. The study proposes to reveal the effectiveness of Inflation Targeting as a policy tool in managing inflation by the Central Bank. The study will also explain why in the face of falling interest rates the Ghanaian Central Bank still achieves its desired objectives of lower rate of inflation. The study will specifically provide information on inflation management in Ghana prior to the establishment of MPC and post establishment of the MPC to determine any significant change in parameters.

Table of Contents

Chapter I Introduction

Background Information

Problem Statement

Organization of Study

Objective of Study

Methodology

Limitation of Study

Relevance of Study

Research Questions

Key Terms

Chapter II Literature Review

What is Inflation?

Problems Associated with High Inflation rates

Inflation Targeting

Proponents of Inflation Targeting

Opposition to Inflation Targeting

Alternatives to Inflation Targeting

Adoption of Inflation Targeting in Emerging Economies

Chapter III

Data Analysis

The Case of the Bank of Ghana and the Adoption of Inflation Targeting

Ghana Prior to the Adoption of MPC

Ghana After the Adoption of MPC

The MPC and Inflation Management/Targeting in Ghana

Inflation Targeting

The current Inflation Outlook

Results of Monetary Management

Results and Findings of the adoption of Inflation Targeting in Ghana

Ghana and Inflation targeting assessment

Chapter IV

Summary of the study

Chapter V Conclusions and Recommendations

Chapter I

Introduction

Throughout the world emerging economies are confronted with the task of managing inflation. The management of inflation is essential to ensuring that the economy will be profitable and sustainable over time. Economies that cannot stabilize inflation rates will have difficulty growing and flourishing over the long run and the quality of life for citizens will suffer.

The country of Ghana, located in West Africa, has undergone many changes over the past few decades as a result of gaining its independence. With this new found independence came the need to embrace an effectual monetary policy so that the economy can prosper. According to Breisinger et al. (2009) Ghana has achieved a significant level of sustained growth during the past two decades. This success is due in part to "improvements in policies and the investment climate, increases in investments

and aid inflows, and favorable world cocoa and other commodity prices (McKay

and Aryeetey, 2004; Bogetic et al., 2007). The most recent national household survey data suggests that, based on current trends, the country will reach the first

Millennium Development Goal (MDG One) of halving 1990's poverty rate by

2008 (GSS, 2007; Breisinger et al., 2008). Thus, Ghana is bound to become one of only a few African countries that are able to achieve 'MDG

One' earlier than the target year of 2015 (Breisinger et al., 2009)."

The success in economic growth and decreasing of poverty that Ghana has experienced has inspired the country to present of new development goal that involves reaching middle-income (MIC) status by 2015 through the utilization of a second Growth and Poverty Strategy or GPRSII (Breisinger et al., 2009). The realization of this particular objective necessitates that Ghana will double its per capita DP from $450 to $1,000 during the next decade. Improving the nation's GDP by this amount will require a great deal of economic expansion (Breisinger et al., 2009). Although such growth may be a challenging endeavor, it is not an impossible scenario. The author reports that other developing countries have achieved such growth but the drivers of such growth differ from country to country. The author also concedes that the realization of such growth is dependent upon the willingness of the country to undergo substantial structural changes within the economy (Breisinger et al., 2009). Additionally, "Structural change (or economic transformation) is a dynamic process that involves the evolution of the sectoral composition of output and employment, and labor productivity over time (Syrquin, 1988, Pieper, 2003; (Breisinger et al., 2009))."

For the nation of Ghana these structural changes have come in the form of inflation targeting implemented by the Bank of Ghana. This monetary policy is designed to stabilize inflation and thus prices. Such stability is what the country needs to prosper economically and meet the aforementioned goals.

The purpose of the research to follow is to provide an in depth explanation of Inflation Targeting as a monetary policy tool in Managing Inflation. The research will focus on several factors that led to the adoption of this policy and why this policy was chosen over other monetary policies.

Background Information

According to Sowo and Ottoo (2007) the management of Economic policy in Ghana has faced many challenged since the nation gained its independence. In fact up until the 1980's the management of the nation's economy was governed by the beliefs of the government as opposed to the needs and desire of the nation's citizenry. Because this was the case the various regimes, which ranged in ideology from quasicapitalism to socialism, instituted wholly different economic policies (Sowo and Ottoo 2007). These varying policies led to chaos and economic devastation for the nation. However, the author concedes that the primary purpose of policy has always been to enhance the standard of living for Ghanaians (Sowo and Ottoo 2007). To this end, the primary objective has been the increases in output and the stabilizing of prices. Additionally, "Monetary management by the central bank as a major arm of economic policy management in Ghana has, by law and practice, often focused on price stability. Yet over the years high rates of inflation -- soaring into triple digits at the close of the 1980s -- have undermined economic performance in Ghana. Even, the strict monitoring of fiscal and monetary aggregates under the International Monetary Fund / World Bank sponsored Structural Adjustment Programme (SAP) could only yield an average inflation rate of about 25% per annum between 1986 and 2000. Inflation, however, has been on a continuous decline since 2001.

Significantly, output growth has also been rising over the same period (Sowo and Ottoo 2007)."

This change in the Ghanaian economy has been due, in part, to the adoption of inflation targeting as a monetary policy tool. Ghana and other countries throughout the world have adopted this strategy in an effort to improve economic conditions. According to Batini and Laxton, (2006) inflation targeting has grown in popularity as a monetary policy. More than 20 nations (industrial and emerging) have implemented inflation targeting as a policy (Batini and Laxton, 2006). There are also many other countries that are considering information technology as a tool to improve economic growth (Batini and Laxton, 2006).

Mishkin & Schmidt-Hebbel (2007) explain that the Reserve Bank of New Zealand was the first to adopt inflation targeting as a monetary tool in 1990. Since this time the central banks of many nations have followed New Zealand's lead. In fact the Czech National and the Bank of Poland were trailblazers in emerging markets becoming the first to implement an inflation targeting strategy (Mishkin & Schmidt-Hebbel, 2007). Although inflation targeting is often discussed as a monetary policy used in emerging markets, it has become a policy embraced by developing economies as well. Nations that have utilized this strategy are inclusive of United Kingdom and Peru (Mishkin & Schmidt-Hebbel, 2007). In addition, Korea, China and Botswana have also used inflation targeting to bring about economic stability. The authors further explain that inflation targeting "attracts growing interest both in developing countries, some of which are still struggling with high inflation, and countries with relatively long history of macroeconomic stability such as the United States or Japan (Mishkin & Schmidt-Hebbel, 2007)."

In fact most economists are well aware that it is widely known that Ben Bernanke, the current Chairman of the Federal Reserve in America, is a supporter of inflation targeting strategies and as such it is not unlikely that the United States may eventually adopt an inflation targeting policy at some point in the future. Additionally many economists have encouraged the Bank of Japan to implement an inflation targeting strategy (Mishkin & Schmidt-Hebbel, 2007).

Indeed, inflation targeting… READ MORE

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