The Impact of Central Bank Independence on Inflation in Ghana

Abstract

Increasing central bank independence is a recommended strategy for government to establish a credible commitment to price stability, which may be at the expense of other objectives that may be more appealing to the political authorities. Most of the literature reports a negative relation between legal independence and inflation in developed countries with the evidence on central bank independence and growth being tenuous. The turnover rate of the central bank governors (which is the rate at which governors are changed) tends to be positively associated with inflation in less developing countries, implying that low turnover rates is associated with low inflation, the reverse is true. This paper seeks to explore the impact of the degree of independence of the Bank of Ghana on inflation from the actual measure of central bank independence context since 1970 to 2007, making use of a general inflation model. The results reveal a negative impact on inflation in Ghana. Which suggests that the turnover rate of governors has a negative effect on inflation. Since the governor of the Bank of Ghana is appointed by the government, there is the likelihood to succumb to pressures from government in the hope to avoid the termination of appointment. The governmental influence makes the pursuance of effective monetary policies less likely on the part of the governor. The policy implications and recommendations from the study emphasize the need to put in place checks to ensure an effective and efficient transparent mechanism between the Bank of Ghana and the general public. Secondly, the goals of the Bank of Ghana should be clearly defined as well as the monetary instrument to be employed to achieve the goals. Finally, the enactment of the fiscal responsibility law will ensure fiscal discipline on the part of government.