Economist, Dr. Eric Osei-Assibey has made a strong case for a review of inflation targeting, used by the Bank of Ghana (BoG) to control the rate at which prices change in the country.
According to him, available evidence shows that using the policy rate to influence inflation is unproductive, hence has left a wide gap between the inflation rate and the policy rate.
Dr. Osei-Assibey made the argument at a lecture organized by the Institute of Economic Affairs on Inflation Targeting.
Inflation targeting is a monetary policy regime in which the central bank publicly announce an end of year inflation target, and works to achieve it.
It is a major monetary policy used by some central banks across the world to control the rate at which prices of goods and services change over a period of time.
The Bank of Ghana has used this method for over a decade.
But making a firm case for a review of the use of Inflation Targeting by the Bank of Ghana, Dr. Osei-Assibey maintained that the method has failed, hence it is time to adopt a dual targeting system, by adding real exchange rate targeting.
“Ten years after the implementation of Inflation Targeting, what is the sacrificed cost.? The real cost, the real economic cost. Our growth has been flat, we could have done much better, interest rate remains one of the highest in the sub-region, in Africa, and across the globe. Unemployment in Ghana is also high,” he argued.
He admitted that even though the central bank has been able to reduce inflation rate over the period, it has come at a high cost reflecting in the cost of doing business.
He added that Inflation Targeting is not effectively work for Ghana since the economic fundamentals that supports its implementation are not available in the country.
“The Institutions are weak, the transmission mechanism is weak. We depend so much on commodity prices. Our Exchange Rate fluctuates every now and then, so the fundamentals are so weak to support a very good regime which is inflation targeting,” he stressed.
However, Economist Professor Godfred Bokpin was of the view that Inflation Targeting regime is effective if all the assumptions guiding the theory are in place.
He stressed that “Inflation Targeting is effective to the extent that there are certain requirements that must be met”.
“These requirements include Institutional, structurally, the political side, independence of the central bank and other factors”.
He argued that “These conditions haven’t been met and therefore it may not be because the policy is ineffective, but the underlining issues haven’t been addressed”.
Prof. Bokpin stated that another major issue is fiscal dominance which is out of the control of the Bank of Ghana.
“Unfortunately the fiscal dominance side cannot be resolved by the central bank, it has more to do with the Ministry of Finance and the political side of the economy”