Estimating bank of Ghana's policy responses in the context of Taylor rule: Is the inflation target realistic?

Idd isu, Abdul-Aziz; Alagidede, Imho ep Paul A icle Es ima ing bank o Ghana's policy esponses in he con ex o Taylo ule: Is he in la ion a ge ealis ic? Cogen Economics & Finance P o ided in Coope a ion wi h: Taylo & F ancis G oup Sugges ed Ci a ion: Idd isu, Abdul-Aziz; Alagidede, Imho ep Paul (2021) : Es ima ing bank o Ghana's policy esponses in he con ex o Taylo ule: Is he in la ion a ge ealis ic?, Cogen Economics & Finance, ISSN 2332-2039, Taylo & F ancis, Abingdon, Vol. 9, Iss. 1, pp. 1-18, h ps://doi.o g/10.1080/23322039.2021.1988201 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/270168 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. 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This open access a icle is dis ibu ed unde a C ea i e Commons A ibu ion (CC-BY) 4.0 license. Published online: 21 No 2021. Submi you a icle o his jou nal A icle iews: 931 View ela ed a icles View C ossma k da a FINANCIAL ECONOMICS | RESEARCH ARTICLE Es ima ing bank o Ghana’s policy esponses in he con ex o Taylo ule: Is he in la ion a ge ealis ic? Abdul-Aziz Idd isu 1 and Imho ep Paul Alagidede 2 ABSTRACT: Al hough li e a u e acknowledges he nonlinea i y in mone a y policy beha iou o cen al banks, he app op ia eness o he models used o cap u e he nonlinea i y emains ques ionable. Mo eo e , he pauci y o esea ch on nonlinea mone a y policy ules in he con ex o A ica and Ghana in pa icula is wo ying, gi en he nume ous b eaches o he publicly announced in la ion a ge s. The s udy es ima es he Bank o Ghana’s policy esponses o e he in la ion a ge ing pe iod using he Taylo ule. We ind ha he Bank o Ghana eac s asymme ically o in la ion gap below and abo e he es ima ed in la ion h eshold o 16.4% wi h conside able in la ion accom- moda ion ins ead o a ge ing i . We ques ion he logic behind he p e ailing uppe and lowe bounds in la ion a ge gi en he e idence o he con a y. The a e age in la ion o e he a ge ing pe iod, he es ima ed in la ion h eshold and he s uc u e o he Ghanaian economy aise ques ions o easibili y o achie ing he in la ion a ge on sus ainable basis. Policy implica ions a e discussed. Subjec s: Economics; Finance; Managemen and Accoun ing ABOUT THE AUTHOR Abdul-Aziz Idd isu is a senio lec u e in inance a he Banking Technology and Finance Depa men o Kumasi Technical Uni e si y, Ghana. His esea ch in e es co e s mone a y and iscal policies, banking sec o e iciency and s abili y, de elopmen inance, co po a e inance and heal h economics. He comple ed his PhD a he Wi s Business School, Uni e si y o he Wi wa e s and, Sou h A ica. He holds an MSc in Finance and Managemen om C an ield Uni e si y’s School o Managemen , UK. He is a P incipal Consul an a AREF Consul . Imho ep Paul Alagidede is a me aeconomis and p o esso o inance a he Uni e si y o he Wi wa e s and. His esea ch and eaching in e - es s anscends adi ional academic bound- a ies, del ing in o he possibili ies and limi s o human consciousness. Imho ep is he g and edi o o he Jou nal o Indigenous and Shamanic S udies, Edi o -in-Chie o he Ghanaian Jou nal o Economics, Managing Edi o o he Jou nal o A ican Poli ical Economy and De elopmen and Execu i e Di ec o o AREF Consul . PUBLIC INTEREST STATEMENT The Bank o Ghana, since he launch o i s in la- ion- a ge ing amewo k in 2007, has missed he publicly announced in la ion a ge many imes han i has achie ed i . This pape gauges he mone a y policy esponses o he Bank o Ghana o e ha pe iod in he Taylo ule con ex . The esul s show conside able in la ion accommoda- ion, gi en he ela i e weigh s on expec ed in la ion gap below and abo e he es ima ed in la ion h eshold o 16.4%. The a e age in la ion a e o e he pe iod o s udy, he es ima ed in la ion h eshold and he na u e o he coun y’s economic undamen als aise ques ions o easi- bili y o he announced in la ion a ge on sus- ainable basis wi h ami ica ions o he cen al bank’s c edibili y. The esul s hold policy ele ance o he Bank o Ghana and a numbe o de elop- ing economies conside ing an explici in la ion a ge ing amewo k. Idd isu & Alagidede, Cogen Economics & Finance (2021), 9: 1988201 h ps://doi.o g/10.1080/23322039.2021.1988201 Page 1 o 18 Recei ed: 23 July 2020 Accep ed: 25 Sep embe 2021 Co esponding au ho : Abdul-Aziz Idd isu, Depa men o Banking Technology and Finance, Kumasi Technical Uni e si y, Kumasi, Ghana E-mail: [email p o ec ed]. gh; [email p o ec ed] Re iewing edi o : Da id McMillan, Uni e si y o S i ling, S i ling Uni ed Kingdom Addi ional in o ma ion is a ailable a he end o he a icle © 2021 The Au ho (s). This open access a icle is dis ibu ed unde a C ea i e Commons A ibu ion (CC-BY) 4.0 license. KEYWORDS: Mone a y Policy Rule; Th eshold; In la ion Ta ge ing; Sample Spli ing 1. INTRODUCTION Mone a y policy ules ha e long been ad oca ed o in he wake o economic ins abili ies and p olonged in la iona y episodes ha we e hough o ha e been occasioned by mone a y mis akes (Taylo , 2017). Taylo (1993) p o ided one o he ounda ions o ule-based mone a y policy by o mula ing a linea model ha adequa ely desc ibed he mone a y policy beha iou o he Fede al Rese e Bank pa icula ly be ween 1987 and 1992. This phenomenal success endea ed he Taylo (1993) ule o many p ac i ione s and occasioned an unp eceden ed olumes o policy ule esea ch wi h a ying esul s o di e en coun ies (see Alleg e & Benkhodja, 2015; Li & Liu, 2017; Aguia -Con a ia e al., 2018; Bleaney e al., 2020;; Mgadmi e al., 2021). A bu geoning pa adigm in he policy ule li e a u e is he a gumen ha mone a y policy beha iou o cen al banks is no necessa ily linea , aising doub s abou he amous Taylo (1993) ule in a linea con ex . Business cycle a ia ions (Liu e al., 2018), he e ogenei y in he objec i es and p e e ences o mone a y policy au ho i ies (Caglayan e al., 2016;; Su e al., 2016) and he nonlinea ela ionship be ween mac oeconomic a iables (Capo ale e al., 2018) a e ample easons why policy beha iou is no linea . Indeed, some au ho s (Su ico, 2007;; Hasano & Omay, 2008) asse ha asymme y in mone a y policy beha iou can be a ibu ed o poli ical p essu es on cen al banks. Thei a gumen is ha when a cen al bank igh ens mone a y policy o dampen in la ion, i may come unde immense poli ical p essu e as compa ed o when i loosens policy o buoy employmen . A undamen al limi a ion o he g owing nonlinea mone a y policy ule li e a- u e is he app oach o unea hing he nonlinea i y (Idd isu & Alagidede, 2021). As a gued by Liu e al. (2018) and Capo ale e al. (2018), a la ge numbe o hese nonlinea s udies use models such as logis ic smoo h ansi ion eg ession, egime swi ching and s uc u al change ha a e inhe - en ly linea and he e o e ail o cap u e he nonlinea cha ac e is ics p ope ly. The models also exhibi cha ac e is ics o s uc u al b eaks ac oss egimes. Howe e , in he sho e m, mone a y policy make s seldom engage in adjus men s o mone a y policy ule on a la ge scale (Liu e al., 2018). Fu he mo e, he dea h o esea ch on nonlinea mone a y policy ules on A ica is wo ying. We obse ed ha no only a e s udies on A ica limi ed, hey a e la gely based on linea policy ules. Meanwhile, li e a u e acknowledges ha when mone a y policy is op imal in each coun y, he global mone a y policy space becomes op imal on he agg ega e (Taylo , 2017). Mone a y policy op imali y o cen al banks in A ica is ce ainly pa o he s o y as i is one o he con inen s wi h he la ges numbe o coun ies and in a iably he la ges numbe o cen al banks. The nonlinea s udies, o he bes o ou knowledge, ac oss he whole o A ica a e Ncube and Tshuma (2010), Na aidoo and Rapu soane (2011), Na aidoo and Paya (2012), Baaziz e al. (2013), and Idd isu and Alagidede (2021) o Sou h A ica, Baaziz and Labidi (2016) o Egyp and Tunisia and Mgadmi e al. (2021) o Tunisia. No ably missing in he nonlinea policy ule li e a u e in he con ex o A ica is Ghana, he only o he A ican coun y apa om Sou h A ica o ha e adop ed ull- ledged in la ion a ge ing amewo k ha in i sel is a o m o a policy ule. The Bank o Ghana has s uggled o achie e he in la ion a ge since he adop ion o he explici in la ion a ge ing amewo k in 2007 wi h in la ion peaking a 20.7% in June 2009. Ghana he e o e p o ides an impo an case o policy ule s udies o unea h he na u e o policy esponses and he ex en o success o he a ge ing amewo k. Idd isu & Alagidede, Cogen Economics & Finance (2021), 9: 1988201 h ps://doi.o g/10.1080/23322039.2021.1988201 Page 2 o 18 The cu en s udy he e o e makes a numbe o con ibu ions o he policy ule li e a u e. Fi s , o cap u e nonlinea i y app op ia ely, as ha has been a majo limi a ion in he li e a u e, we employ he sample spli ing and h eshold es ima ion echnique de eloped by Hansen (2000). This model, in addi ion o an accu a e h eshold e ec es ima ion, also un a els he a ying e ec s o ou pu and in la ion gaps on he policy a e when in la ion exceeds o alls below he op imal h eshold. The unc ional o m o nonlinea i y o o he wise ha he ela ionship be ween he eg esso s and he policy a iable aken is no assumed o supe imposed a p io i by he model. Indeed, an impo an i ue o ou es ima ion echnique is he ac ha i empi ically p o ides he con idence in e als o he h eshold’s s a is ical signi icance wi h he aid o he asymp o ic heo y. In addi ion, he esul ing asymp o ic dis ibu ion o he h eshold pa ame e ’s leas squa e es ima e is de oid o nuisance pa ame e s ha o he h eshold models su e (Hansen, 2000). Mo eo e , he app oach does no equi e a p ede e mina ion o he h eshold alue as his is done by he model i sel . The nonlinea mone a y policy ule es ima ion o Ghana becomes a majo con ibu ion in he li e a u e as he limi ed exis ing s udies on he coun y by Boamah (2012) and Bleaney e al. (2020) a e all linea policy ule cha ac e iza ions. We ind a h eshold in la ion 16.4% which is a om he uppe limi o 10% o he in la ion a ge ange, aising ques ions o easibili y o he se a ge ange in he ace o nume ous misses. We obse e subs an ial in la ion accommoda ion on he pa o a cen al bank ha is supposed o be a ge ing in la ion. 1.1. MONETARY POLICY FRAMEWORK IN GHANA Ghana is he second coun y in Sub-Saha an A ica o adop ull- ledged in la ion a ge ing ame- wo k a e Sou h A ica wi h a clea manda e o he Bank o Ghana o deli e p ice s abili y. The medium- a ge in la ion (headline) in Ghana is cu en ly 8% �2 join ly de e mined by he mone- a y and iscal au ho i ies. The Bank o Ghana enjoys ope a ional independence ensh ined in he Bank o Ghana Ac (2002) and pa icula ly ins umen independence o guide in la ion o he s ipula ed a ge . Mone a y policy decisions a e made by he Mone a y Policy Commi ee which has se en membe s. Fi e ou o he se en membe s a e in e nal s a o he cen al bank wi h he go e no as he chai pe son o he commi ee. The emaining wo membe s a e ex e nal and appoin ed by he Finance Minis e (Bank o Ghana, n.d.). The Mone a y Policy Commi ee si s e e y o he mon h ( hus e e y 2 mon hs wi h da es published in ad ance) o he pu poses o de e mining mone a y policy a es mean o ancho expec a ions and ein in in la ion. Each o hese mee ings akes place in 2 days wi h a climax o a p ess con e ence on he mone a y policy decision on he hi d day. E e y membe o he commi ee has a single o e on he in e es a e de e mina ion backed by jus i ica ions o he s ance o he indi idual. The e en ual decision on a pa icula policy a e o policy s ance is eached h ough consensus. While economic epo s unde pinning he policy decisions o each mee ing a e published, he minu es o he mee ings a e no . When he in la ion a ge is missed, he Bank o Ghana is no unde any legal obliga ion o explain he easons o he ailu e o ei he he pa liamen o he coun y o he iscal au ho i ies. The pa liamen ’s inance commi ee can, howe e , summon he go e no o he cen al bank o explain de elopmen s in he coun y (Bank o Ghana, n.d.). 2. LITERATURE REVIEW The Taylo (1993) linea ule, o mula ed o cha ac e ize he mone a y policy o he Fede al Rese e Bank o he Uni ed S a es (Fed) om 1987 o 1992 e en ually became a model o ule- based mone a y policy and mone a y policy assessmen globally. The widesp ead implemen a ion o he Taylo ule in he li e a u e ollows i s phenomenal success in exac ing he cha ac e iza ion Idd isu & Alagidede, Cogen Economics & Finance (2021), 9: 1988201 h ps://doi.o g/10.1080/23322039.2021.1988201 Page 3 o 18 o he Fed’s mone a y policy o e he sample pe iod. In i s basic o m, he Taylo (1993) ule was o mula ed as: i¼πþ1=2yð Þþ1=2π2ð Þþ2 such ha he y ep esen s de ia ions o eal GDP om i s a ge , i deno es he ede al unds a e and π is in la ion a e o e he las ou -qua e s. The ede al unds a e is o mula ed o adjus upwa ds when ou pu soa s beyond i s end and when in la ion b eaches 2%. Following i s success, he Taylo ule in i s basic o m has been implemen ed in con ex s o he han he Uni ed S a es o Ame ica and he esul s a e a ied (see Alleg e & Benkhodja, 2015; Li & Liu, 2017; Aguia -Con a ia e al., 2018; Bleaney e al., 2020;; Mgadmi e al., 2021). Such di e ences in he esul s a e no a - e ched gi en ha he economic a chi ec u e and undamen als o many coun ies a e na u ally dispa a e om ha o he Uni ed S a es o which he policy ule was ini ially o mula ed. The he e ogenei ies in he economic eali ies ha con on di e en coun ies p omp ed he need o modi ica ions o he basic Taylo ule in applica ion o di e en con ex s. Fo small open economies in pa icula , he basic Taylo ule migh be a om eali y gi en he colossal ole o he ex e nal sec o h ough he exchange a e ha he basic Taylo ule igno es. Caglayan e al. (2016) unde sco ed he need o a depa u e om mone a y policy ules ha dwell on close economy con ex o a one ha emb aces open economy cha ac e is ics h ough exchange a e. O he au ho s o ha e called o he inclusion o exchange a e in he policy ule o mula ion o small open economies include F oyen and Guende (2018), Capo ale e al. (2018), Ghosh e al. (2016), and Daude e al. (2016). Beyond exchange a es, Papadamou e al. (2018) ha e pu o wa d an a gumen o he augmen a ion o he policy ule wi h measu es o inancial s abili y whiles Wang e al. (2019) and Beckmann e al. (2017) ha e, espec i ely, conside ed measu es o weal h and in e na ional spillo e s. Wi h he obse ed business cycle a ia ions (Liu e al., 2018), he e ogenei y in he objec i es and p e e ences o mone a y policy au ho i ies (Caglayan e al., 2016;; Su e al., 2016) and he non- linea ela ionship be ween mac oeconomic a iables (Capo ale e al., 2018), ques ions o sui - abili y and alidi y o he linea Taylo ule in cap u ing mone a y policy beha iou o cen al banks became appa en in he li e a u e and p ecipi a ed phenomenal olumes o nonlinea policy ule exposi ions. Howe e , Liu e al. (2018) and Capo ale e al. (2018) posi ha in cap u ing he nonlinea i y in mone a y policy beha iou , a la ge numbe o hese nonlinea s udies use models ha a e hemsel es inhe en ly linea . Impo an ly, he igh cha ac e iza ion o he mone a y policy beha iou o cen al banks is e en mo e c ucial (Idd isu & Alagidede, 2021). The cu en s udy adop s a h eshold es ima ion echnique ha cap u es nonlinea i y adequa ely de oid o a p io i imposi ions and ee o nuisance pa ame e s ha o he models su e . 3. METHODOLOGY 3.1. Da a and da a sou ces We used mon hly da a o all he se ies om Janua y 2007 o June 2018. Gi en ha he s udy examines he na u e o mone a y policy esponses o e he in la ion a ge ing pe iod, he collec- ion o da a is ma ched wi h ha pe iod. As explici in la ion a ge ing amewo k was un eiled in Ghana in 2007, he da a o his s udy also s a s om 2007. We ob ained he da a on all he a iables om he websi e o Bank o Ghana (h ps://www.bog.go .gh/economic-da a/ ime-se ies/). Idd isu & Alagidede, Cogen Economics & Finance (2021), 9: 1988201 h ps://doi.o g/10.1080/23322039.2021.1988201 Page 4 o 18 3.2. Desc ip ion o a iables In es ima ing he nonlinea Taylo ule, we used ou pu and in la ion gaps and mone a y policy ins umen . These a e de ined in Table 1 below: 3.3. Desc ip i e s a is ics We p o ide, in Table 2,3, he summa y s a is ics. The a e age in la ion a e in Ghana o e he pe iod is 13.35% which is 3.35% abo e he uppe limi o 10% o he in la ion a ge ange. Indeed, o mos pa o he pe iod, Ghana’s in la ion has well been abo e he uppe limi o 10%, wi h in la ion eaching as high as 20.7% in June 2009. E en hough he coun y enjoyed single-digi in la ion be ween June 2010 and 2012 and mo e ecen ly be ween Ap il and Augus 2018, he lowe band o 6% has since eluded he coun y. In Figu e 1 we p esen he line g aph o mone a y policy a e and in la ion o e he in la ion a ge ing pe iod. We obse e ha mone a y policy and in la ion ha e ended o mo e oge he wi h occasional d i . 3.4. Tes o s a iona i y We asce ain he s a iona i y p ope ies o ou se ies using he Phillips Pe on (PP) es de eloped by Phillips and Pe on (1988) and he Augmen ed Dickey–Fulle (ADF) es de eloped by Dickey and Fulle (1981). In bo h he ADF and he PP es s, we include in e cep and end and we ind all he a iables excep he ou pu gap o be s a iona y a e he i s di e ence. Ou pu gap is s a iona y a he le el. The a iables ha a e no s a iona y a he le els en e he model a e he i s di e ence. 3.5. Empi ical app oach The h eshold a iable, in a ypical h eshold analysis, would no mally ha e a quad a ic e m imposed on i a p io . Howe e , no only is ha ques ionable, bu such an app oach also ails o cap u e he media ion ole ha he ini ial alues o he h eshold a iable would play in he h eshold e ec (Alagidede e al., 2018;; Ib ahim & Alagidede, 2018). Ou es ima ion echnique, in addi ion o an accu a e h eshold e ec es ima ion, also un a els he a ying e ec s o he eg esso s on he policy a e when in la ion exceeds o alls below he op imal h eshold. The s udy uses he Sample Spli ing and Th eshold Es ima ion de eloped by Hansen (2000). Ou linea model is exp essed as: mp ¼β0þβ1E ω þkω � � �þβ2E y þky� � � �þε (2) such ha he mone a y policy ins umen is ep esen ed by mp , in la ion is ep esen ed by ω þk while a ge in la ion is ep esen ed by ω and he e o e he in la ion gap is ep esen ed by ω þkω . Then y þky� ep esen s he ou pu gap, and ε is he e o e m. The E in he speci ica ion ep esen s expec a ions. The inco po a ion o expec a ion in ou model speci ica ion is in line wi h he a gumen ha policy make s espond o u u e o expec ed in la ion and ou pu gaps (Wood o d, 2001; Cla ida e al., 1999;; S ensson, 1996). As a esul , he da a on in la ion gap and ou pu gap a e wo-mon h lead a iables. The choice o wo-mon h pe iod lead is in o med by he ac ha he Mone a y Policy Commi ee o Bank o Ghana mee s e e y 2 mon hs o decide on he policy a e ( hus a o al o six imes in a yea ). F om he abo e equa ion, ep esen ing he dependen a iable by y and he eg esso s by x, hen he se {yi;;xi;;ign i1 ep esen s he obse ed sample such ha xi deno es an m- ec o while yi and ;i a e eal- alued. Meanwhile, ;i, which deno es he h eshold a iable and gi en by ;i¼ω 2has Idd isu & Alagidede, Cogen Economics & Finance (2021), 9: 1988201 h ps://doi.o g/10.1080/23322039.2021.1988201 Page 5 o 18 Table 1. Va iables Desc ip ion Va iable name Desc ip ion Mone a y policy ins umen To cap u e mone a y policy, we used he mone a y policy a e which is he policy ins umen used by he Bank o Ghana. The Bank o Ghana se s he mone a y policy a e as a e lec ion o i s mone a y policy s ance. In la ion gap We es ima e he in la ion gap as he di e ence be ween he yea -on-yea change in in la ion a e and he midpoin o Bank o Ghana’s in la ion a ge which is simila o he wo k o Bleaney e al. (2020). We expec ha he Bank o Ghana would eac mo e agg essi ely o posi i e in la ion gap han nega i e in la ion gap. Mo e speci ically, mone a y policy au ho i ies would espond posi i ely o inc easing in la ion gap. Ou pu gap Ou pu gap: Da a on g oss domes ic p oduc (usually used as p oxy o ou pu ) is no a ailable in mon hly se ies, o cing us o ely on an al e na i e measu e o ou pu o economic ac i i ies. We used he composi e index o economic ac i i ies compiled by he Bank o Ghana as a measu e o ou pu in line wi h Bleaney e al. (2020) and he e o e he ou pu gap becomes he pe cen age change in he log o composi e index o economic ac i i y om i s end. To calcula e he end, we employed he uni a ia e s uc u al ime se ies model which decomposes he ou pu se ies in o he cycle and end componen s in line wi h he wo k o Koopman e al. (2009). Fo he pu pose o he decomposi ion, he model is speci ied as ollows: (1) y ¼μ þδ þP P ~ NID 0;σ2 P  �; ¼1...::T(1) such ha y ep esen s ou pu , μ deno es he end componen , wi h he cycle componen deno ed by δ and he i egula componen is ep esen ed by P . The es ima ion is done by way o Maximum Likelihood. P e ious s udies (Ma, 2016; Liu e al., 2018; and Capo ale e al., 2018) had used he il e o Hod ick and P esco (1997) popula ly known as he HP il e . Howe e , he HP il e su e s om a ious inadequacies. The HP il e equi es a p io de e mina ion o he pa ame e (λ) ha penalizes smoo hness e sus i , he choice o which is usually a bi a y (Ál a ez & Gómez-Loscos, 2018). Addi ionally, o se ies ha ha e a classical spec al shape, he HP il e is said o engende spu ious cycles (Ál a ez & Gómez-Loscos, 2018). Mo eo e , he HP il e beha es poo ly in espec o obse a ions o pe iods ha a e mos ecen (Capo ale e al., 2018; and Ál a ez & Gómez-Loscos, 2018). Fu he mo e, he HP il e may e oneously speci y he s uc u e o he economy as he alues pu o wa d by he il e a e idiosync a ic o he Uni ed S a es’ economic se ing (Capo ale e al., 2018; and Sa ikaya e al., 2005). Fo eme ging ma ke s and A ica in pa icula , he ola ili y o ou pu is an inhe en cha ac e is ic and he e o e he use o HP il e o end es ima ion may su e g ea e a iabili y (Capo ale e al., 2018). The model-based app oach o decomposing cycle and end used in his s udy has he ad an age ha i implici ly de ines he il e s and o which eason he il e s deli e op imali y. These il e s exhibi consis ency wi h each o he as well as wi h he ou pu da a we used (Ha ey & T imbu , 2003). Impo an ly, he consis ency o he il e s wi h each o he is seen bo h a he s a and end o he ou pu da a. Tha is, hey adap au oma ically o he ends o ou sample. Signi ican ly, by es ima ing he pa ame e s, he ou pu se ies’ p ope ies a e in synch ony wi h he accompanying il e s (Ha ey & T imbu , 2003). Idd isu & Alagidede, Cogen Economics & Finance (2021), 9: 1988201 h ps://doi.o g/10.1080/23322039.2021.1988201 Page 6 o 18 a con inuous dis ibu ion. The lag o in la ion is he h eshold a iable in line wi h Capo ale e al. (2018) wi h he in ui ion ha policy make s agg essi ely eac mo e o he o e shoo ing o in la ion han he unde shoo ing o in la ion and pa icula ly as we a e dealing wi h an in la ion a ge ing cen al bank. Ou es ima ion o h eshold is speci ied as ollows: mp ¼β11 þβ21 E ω þkω � � �þβ31 E y þky� � � � �di;i�θi g þβ12 þβ22 E ω þkω � � �þβ32 E y þky� � � � �di;i>θi gþ ε (3) such ha an indica o a iable deno ed by di{.} is a dummy which has a alue o 1 when he condi ion in he indica o unc ion is ul illed, o he wise i is 0. Meanwhile, θ ep esen s he h eshold alue. P io o he h eshold es ima ion, we begin wi h he es o linea i y and ou null hypo hesis is ha βi1¼βi2agains βi1�βi2. Table 2. Summa y S a is ics MPR INF OUTPUT Mean 17.67571 13.34971 334.9969 Maximum 26.00000 20.70000 1148.830 Minimum 12.50000 8.390000 14.60000 S d. De . 4.237260 3.744857 119.0975 Skewness 0.662517 0.321194 2.146463 Ku osis 2.360419 1.725088 16.93870 Obse a ions 140 140 140 No e: MPR is mone a y policy a e and INF is in la ion a e Figu e 1. Ghana’s mone a y policy a e and in la ion. Idd isu & Alagidede, Cogen Economics & Finance (2021), 9: 1988201 h ps://doi.o g/10.1080/23322039.2021.1988201 Page 7 o 18 5. POLICY DISCUSSION AND CONCLUSION The s udy es ima ed he mone a y policy esponses o he Bank o Ghana in he Taylo (1993) ule con ex . Wi h a boo s ap p- alue signi ican a 5%, he linea i y p oposi ion is ejec ed. In o he wo ds, he policy esponses and beha iou o he Bank o Ghana a e be e cap u ed by a nonlinea Taylo ule. The esul s om he h eshold model indica e ha he Bank o Ghana adjus s he mone a y policy a e by 0.34% below he in la ion h eshold o 16.4% ollowing a pe cen age change in expec ed in la ion gap. Abo e he h eshold, mone a y policy esponse o in la ion gap is posi i e bu insigni ican s a is ically. Indeed, he size o he coe icien o in la ion gap abo e he h eshold is a less han he esponse below he h eshold. The indings in ou s udy ca y eno mous policy ele ance. Wi h an es ima ed in la ion h eshold o 16.4%, he se in la ion a ge o 8%�2 is a om he coun y’s economic c eden ials. Indeed, he a e age in la ion a e o 13.35% o e he pe iod and he ailu e by he Bank o Ghana on Table 6. Th eshold Tes —Robus ness Check Mode a ed by No. o Boo s ap eplica ions T imming Pe cen age LM-Tes o no h eshold Boo s ap p- alues In la ion 5,000 15 13.48 0.012 No e: The e o s a e co ec ed o he e oscedas ici y. Table 7. Con olling o Exchange Ra e Panel A: The Linea Model Panel B: The Th eshold Model Va iables Global OLS Regime 1: [; � θ] Regime 2: [;>θ] In e cep 0.036 (0.056) −0.110* (0.061) 0.276*** (0.091) y þky� 0.042 (0.074) 0.017 (0.082) 0.503 (0.656) ω þkω 0.227*** (0.077) 0.315** (0.115) 0.172** (0.073) EXCH þk−0.207 (1.945) 4.489* (2.459) −4.628*** (0.830) Diagnos ics (Linea Model) Obse a ions 138 Sum o Squa ed E o s 45.52 Residual Va iance 0.34 R Squa ed 0.06 He e oscedas ici y Tes (p- ale) 0.98 Diagnos ics (Th eshold Model) Th eshold es ima e 16.4 95% con idence in e al [14.2, 16.5] Obse a ions 95 43 R Squa ed 0.15 0.11 Sum o Squa ed E o s 28.64 11.67 Residual Va iance 0.32 0.30 Join R Squa ed 0.17 He e oscedas ici y Tes (p- alue) 0.98 No e: *** and ** ep esen 1% and 5% signi icance le els espec i ely. The s anda d e o s in b acke s a e co ec ed o he e oscedas ici y. Idd isu & Alagidede, Cogen Economics & Finance (2021), 9: 1988201 h ps://doi.o g/10.1080/23322039.2021.1988201 Page 14 o 18 a numbe o occasions o mee he se a ge o e he in la ion a ge ing pe iod lend c edence o ou asse ion. A e iew o he a ge is necessa y o help ancho in la ion expec a ions p ope ly. Se ing an unachie able a ge is a su e way o epu a ional damage, con idence de ailmen and mac oeconomic jeopa dy. The whole in la ion a ge ing amewo k h i es on cen al bank c ed- ibili y and so con inuous ailu e o achie e in la ion a ge s de ail he e y essence and ounda ion o he amewo k ha he Bank o Ghana p ac ices. When he public ge s used o hese ailu es, i becomes e y di icul o con ince hem ha he Bank o Ghana is capable o achie ing publicly announced in la ion a ge and ancho ing in la ion expec a ions becomes e y di icul , i no impossible. The inding ha he Bank o Ghana is less agg essi e du ing in la iona y episodes is a se ious policy challenge, i no enigma. As an in la ion a ge ing cen al bank, policy es ic ion is expec ed when in la iona y momen um inc eases. The Bank o Ghana would need o ensu e policy consis ency and deli e app op ia e esponses when in la ion ou look de e io a es and when in la iona y ou comes a e abo e he se a ge s o engende disin la ion and guide p ice le els o he announced a ge s. The a he ola ile g ow h pa e n in Ghana dese es some policy a en ion. The na ow ocus on in la ion which he coun y has s uggled o achie e may no be help ul o he g ow h dynamics o he coun y. The quan um o policy esponse ela i e o he ise in expec ed in la ion is e ealing o he ex en o in la ion accommoda ion by he cen al bank ha is supposed o be a ge ing in la ion. This is pe ilous o policy c edibili y and public con idence, which shakes he e y ounda ion o in la ion a ge ing amewo k. The Bank o Ghana would need o demons a e commi men o eining in in la ion when i ises by aking s e ne policy s ance as app op ia e. As indica ed ea lie , when he public ge s used o such in la ion accommoda ion and less commi men o igh ing i , i becomes e y di icul o he cen al bank o ancho expec a ions o in la ion owa ds he publicly announced a ge s in he u u e. Public con idence is no buil only by anspa ency h ough he publica ion o mone a y policy commi ee p oceedings and ela ed indica o s. Indeed, he le el o commi men o igh ing in la ion and he successes he eo a e pe haps mo e ge mane o public con idence building. A ypical Taylo ule in ol es a esponse o mone a y policy a e (in e es a e) o in la ion and ou pu gaps ha ha e been cap u ed by ou model. Some augmen a ions ha e also been sug- ges ed in he li e a u e including exchange a e o small open economies, which we ha e done as well. The in la ion dynamics o Ghana also e eal impo an ac o s ha d i e in la ion bu which we e no explici ly measu ed o included as eg esso s in ou model. These ac o s a e c ude oil Figu e 3. Con idence In e al (Robus ness). Idd isu & Alagidede, Cogen Economics & Finance (2021), 9: 1988201 h ps://doi.o g/10.1080/23322039.2021.1988201 Page 15 o 18 p ices, ood in la ion and iscal balance, pa icula ly he e ec o deb bu den. Fu u e esea ch should look a hese a iables in he policy ule cons uc ion. Acknowledgemen s No applicable. Funding No unding ecei ed o his manusc ip . Au ho de ails Abdul-Aziz Idd isu 1 E-mail: [email p o ec ed] Imho ep Paul Alagidede 2 E-mail: [email p o ec ed] 1 Depa men o Banking Technology and Finance, Kumasi Technical Uni e si y, Kumasi, Ghana. 2 Wi s Business School, Uni e si y o he Wi wa e s and, Johannesbu g, Sou h A ica. Disclosu e s a emen We do no ha e any con lic o in e es . Ci a ion in o ma ion Ci e his a icle as: Es ima ing bank o Ghana’s policy esponses in he con ex o Taylo ule: Is he in la ion a ge ealis ic?, Abdul-Aziz Idd isu & Imho ep Paul Alagidede, Cogen Economics & Finance (2021), 9: 1988201. Re e ences Aguia -Con a ia, L., Ma ins, M. M., & Soa es, M. J. (2018). 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