TAYLOR RULE AND MONETARY POLICYMAKING IN SUB-SAHARAN AFRICA
Abstract:This study examined the Taylor rule for the
SSA. Most importantly, it examines the interrelationship between interest rate
and inflation rate in Nigeria, Ghana and Kenya. The effects of some other
variables on inflation rate is also examined. Interest rate can be adjusted to
address inflation rate. The main objective is to check whether inflation rate
can be amenable to interest rate adjustment. If so, interest rate can be used
as a simple policy instrument followed the Taylor rule. The rule has been
tested for the United States and many other economies of the world. The method
used is OLS and estimation techniques is based on VECM. Impulse response is
also obtained to check responses of inflation to shocks from exogenous
variables. The results reveal that Ghana can adopt the Taylor rule, which means
that Ghana can embark on inflation targeting using interest rate or monetary
policy rate as nominal anchor. Nigeria can also adopt the proposition but need
a considerable maintenance of a stable macro economy. Even though Kenyan
economy appears to be statistically more vibrant, the results does not approve
the country for Taylor rule. It is suggested that the SSA requires a stable
macro economy for monetary policymaking in the 21st century. A successful
monetary policy stance rest on a stable, reliable and relatively predictable
framework that can create desirable growth.