Econometric Study Using IMF’s Database: Testing Transmission of USA’s Monetary Policy to Ghana and Nigeria

Abstract

This paper argues that the expansionary U.S. monetary policy drive following the post Covid-19 economic crises generated spillover effect on Ghanaian and Nigerian economies resulting in macroeconomic turbulence. The hypothesis is tested using OLS estimation in a Bayesian VAR model with Litterman/Minnesota prior probabilities of 0.1 assigned to the autoregressive parameters, prior to which the time series properties of the data were investigated. The study thus examines U.S. monetary policy spillovers on monetary policy conduct in Ghana and Nigeria, and the results show that overall, Fed’s unconventional monetary policy shocks positively impact domestic monetary policy rate, interest rate spread and GDP growth rate but negatively impact inflation in both countries. This suggests that emerging economies respond to shocks from the advanced world. The study thus, recommends that governments of emerging countries should design policies to moderate negative monetary spillovers from advanced countries, while harnessing benefits of positive spillovers. This study contributes to literature by identifying term spread, which reflects Fed’s policy shift from short-term interest rates manipulation to large asset purchase and policy announcements as the measure of unconventional monetary policy shocks, which dominated monetary policy conduct in U.S. over the study period.