The Unique Adoption of Inflation Targeting Monetary Policy: Lessons from an Emerging Economy

Abstract

Purpose: The purpose of this study was to examine the extent to which formal announcement of inflation targeting impacts on inflation and inflation volatility, from an emerging economy’s perspective. Methodology: Annual time series data from 1985 to 2014, which was sourced from the World Development Indicators (WDI) and the Bank of Ghana (BoG) was used. The data was interpolated into quarterly data using E-Views. The GARCH (1 1) and AR 2-Newey West Models were employed. Findings: The study found that the formal announcement of inflation targeting had a significant negative impact on inflation and its volatility. Thus, the study discovered that research works arguing that inflation targeting has no beneficial influence on inflation must take into account the type of economic structure at play, policy credibility, institutional efficiency, and the general public's responsiveness to institutional policies and information. Implications: This scholarly work would aid policy makers, academic institutions and the understanding of the general public in matters of inflation targeting. This paper concludes that the formal announcement of inflation targeting contributes greatly to stabilize both the inflation rate and inflation volatility, and that, countries that adopt a piloting-based adoption will not achieve the gains of the policy framework within the piloting period.