Time Series Modeling of Dynamic Responses of Commodity Prices to Monetary Policy Shocks in Ghana

Abstract

The Vector Error Correction (VEC) model was used to assess the impact of monetary policy rate on commodity prices in Ghana. Monthly data on monetary policy rate, commodity prices of cocoa, gold and crude oil from January 2005 to December 2017 obtained from the Bank of Ghana was used for the study. The estimated VEC model aided in establishing long and short run relationships between monetary policy rates and the major commodity prices in Ghana. The study revealed that in the long run, monetary policy rates are negatively correlated to crude oil prices, positively correlated to both cocoa prices and gold prices but to a little extent. It was also evident from the study that in the short run, the first lag of monetary policy rate is negatively related to itself and the second lag of monetary policy rate is positively related to itself. Additionally, the first and second lagged periods of cocoa price have positive influence on monetary policy rate in the short run, but the first and second lagged periods of gold price have negative influence on monetary policy rates in the short run. The Granger causality test also reveals that the movement of cocoa prices in Ghana can be explained to cause the movement of monetary policy rates and gold prices in short run. A positive shock in monetary policy rate will have a positive and persistent effect on itself. Likewise, positive shock in monetary policy rate will have a positive and persistent effect on cocoa prices. The response generated from a positive shock on monetary policy rate has a persistent and decreasing effect on both crude oil and gold prices.