Ghana suited to inflation targeting: IMF paper

The Bank of Ghana's 2007 entry into inflation targeting has shown how well the country is suited to the system, according to research published by the International Monetary Fund (IMF) in early January.

The paper constructs a model for full-fledged inflation targeting in Ghana and finds that the method applies well to the west African country's economy.

The authors acknowledge that monetary policy in emerging market economies faces difficulties in controlling inflation due to credibility problems and the vulnerability of the economies to external shocks. Ghana, however, has dodged both of these problems, the authors write. "Its endogenous credibility allows monetary policy to earn (or lose) credibility, as inflation declines towards the long run target (or rises away from it)," they write.

In addition, simulations from their model show a way for Ghana to achieve stable and low inflation over time, they say. They note the importance of making difficult decisions. "A central bank must, however, be prepared to raise interest rates to a level that dampens demand and brings about visible reductions in inflation. Delaying the policy response - e.g. out of an excessive concern for maintaining short-run output - weakens credibility and results in larger, more prolonged losses," they write.

Click here to read the paper