Monetary Policy And The Credit Channel: Dynamic Panel Data Analysis On The Existence Of A Bank Lending Channel In Ghana

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ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University (Bardhan, 2001, 467).

Signed __________________ Date _________________

TABLE OF CONTENTS

CHAPTER ONE - INTRODUCTION5

1.1 Background Overview5

1.2 Research Aim and Objectives7

1.3 Research Gap and Significance8

1.4 Paper Structure8

CHAPTER TWO - MONETARY POLICY AND BANKING SYSTEM IN GHANA9

2.1 Monetary Policy in Ghana9

2.2 The Banking System in Ghana14

CHAPTER THREE - LITERATURE REVIEW15

3.1 Introduction15

3.2 Review of Past Empirical Studies16

3.3 The Effects of Bank Affiliation, Competition and Technology on the Monetary Policy Transmission Mechanism (BLC)20

3.4 Theoretical Framework of the Bank Lending Channel Model23

3.5 Monetary Policy Objectives, Targets, and Instruments25

3.6 Ghanaian Banking System29

CHAPTER FOUR - DATA & ECONOMETRIC METHODOLOGY33

4.1 Theoretical Methodology33

4.2 Data36

4.3 Dynamic Panel GMM37

CHAPTER 5: EMPIRICAL RESULTS41

CHAPTER 6: CONCLUDING REMARKS44

REFERENCES46

ABBREVIATIONS

BB modelBernanke and Blinder (1988) model

BLCBank Lending Channel

BOGBank of Ghana

BSCBalance Sheet Channel

CPIConsumer Price Index

GDPGross Domestic Product

GMMGeneralised Method of Moment

MPMonetary Policy

MPRMonetary Policy Rate

OLSOrdinary Least Squares

UKUnited Kingdom

USAUnited States of America

VARVector Auto-regressive model

CHAPTER ONE - INTRODUCTION

1.1 Background Overview

Developments in recent times add to the general agreement that actions of banks have an effect on the economy. The general consensus among economists is that banks play a role in the monetary policy transmission mechanism. However, the precise role of banks in this mechanism and how they affect the economy raises considerable controversy in the subjects of finance and economics.

The major policy tool in the monetary transmission process is the interest rate, which is used to either tighten or stimulate the economy through bank lending. Two major views arise in regards to the transmission mechanism: money view and the credit view. The previous view gives no role to banks in the transmission mechanism but explains the relevance of interest rates in the transmission mechanism. In contrast, the latter view regards banks as a channel through which monetary policies affect the economy and further establishes that the effect of monetary policy goes beyond the ISLM synthesis of which interest rates play a major role (Bernanke and Blinder, 1988; Bernanke and Gertler, 1995).

The monetary transmission mechanism is categorised into three distinctive simultaneous operative channels namely: the asset price channel, interest rate channel and the credit channel. The credit channel which is of relevance to this study is made up of the balance sheet channel (BSC) and the bank lending channel (BLC). The BSC focuses on the effect of monetary policy on the balance sheet of borrowers whiles the BLC emphasizes on the impact of monetary policy on loan supply in the banking industry. Thus, from the perspective of the BLC, banks play significant roles in the economy, especially the financial system as ...