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Since independence in 1957, Ghana has pursued three monetary policy regimes: direct controls, monetary aggregates, and inflation targeting. The key policy instruments under the direct control regime were interest rate controls, credit controls, and directed lending. In contrast, the monetary aggregate regime relied on indirect monetary policy instruments like open market operations, rediscount facilities, and reserve requirements. The current policy regime is inflation targeting, and the principal objective of this regime is to keep inflation within the desired range of 7% to 9% per annum to achieve price stability through the adjustment of the Bank of Ghana’s prime interest rate, or the policy interest rate (Bawumia, 2010).
However, Quartey, Owusu-Brown, and Turkson (2017) argued that the central feature of the monetary policy strategies employed over the period between 1954 and 2014 was the nominal anchors. These are exchange-rate targeting, monetary targeting, inflation targeting, and monetary policy with an explicit goal but no explicit nominal anchor.
Generally, the monetary policy transmission channel is how monetary policy decisions affect output and prices (Amidu, 2006; Kovanen, 2011; Meltzer, 1995). The traditional view of the monetary policy transmission mechanism is the interest rate channel. This view states that a fall in real interest rates, following a rise in the nominal money stock, given an unchanged price level in the short-run due to market rigidities, would cause a rise in investment spending with the ultimate effect of increasing aggregate demand and output (Jayaraman & Dahalan, 2008).
In Ghana, the banking sector dominates the financial sector, and bank credit availability has been the primary source of financing private sector firms and meeting public sector borrowing requirements (Baah-Nuako, 1997). The banking industry in Ghana has, over the years, been significantly influenced by the government's financial policy framework, which has undergone significant changes since the early 1970s (Killick, 2010). According to Quartey and Afful-Mensah (2014), the BOG introduced the concept of universal banking in 2003 into the country. Universal banking made it possible for banks to undertake commercial, development, investment, and merchant banking without necessarily having separate banking licenses. The introduction of the universal banking concept made banks versatile in providing services to their customers.
Price stability has been one of the objectives of the monetary policy approach. A policy of price stability keeps the value of money stable, eliminates cyclical fluctuations, promotes economic stability and economic welfare, and helps reduce inequalities in income. Price stability does not mean that prices remain unchanged indefinitely. According to Dasgupta and Hagger (1971), the stability of some appropriate price index, like the consumer price index, is required to measure price stability or inflation rate. Mishkin (2016) defined price stability as low and stable inflation and argued that it is predominantly viewed as the most important goal of monetary policy. He argued that price stability is desirable because a rising price level (inflation) creates uncertainty in the economy. This uncertainty might hamper economic growth and make it challenging to plan for the future, negatively affecting GDP growth.
A country's gross domestic product (GDP) comprises the value of all goods and services produced within a given period, such as a year. GDP is, thus, the total market value of final goods and services produced in a given country in a given year and equals total consumer, investment, and government spending, plus the value of exports, minus the value of imports. GDP can be measured in three equivalent ways: value-added in production, factor income including profits, or final expenditure. GDP is the most commonly known measure of national income, output, and growth and is of two types: nominal GDP and real GDP. Nominal GDP measures output at current prices, while real GDP measures output at constant prices and adjusts nominal GDP for changes in the GDP deflator due to inflation.