Monetary policy and unemployment nexus: evidence from Ghana

Purpose This study analyzed the impact of monetary policy on unemployment in Ghana. In addition, the direction of causality among the monetary policy rate, the growth of the money supply and unemployment was performed. Design/methodology/approach We used the vector error correction model and annual data from 1991 to 2020. Findings The results show that the monetary policy rate positively and significantly affected unemployment in the long run. In contrast, money supply growth negatively and significantly impacted unemployment. However, in the short run, both the monetary policy rate and money supply growth had a negative and insignificant effect on unemployment. We also found that the adoption of inflation targeting reduces the unemployment rate. The causal analysis shows a unidirectional causality from the monetary policy rate to unemployment and from unemployment to money supply growth. Practical implications The study suggests that the Central Bank of Ghana creates a conducive investment environment by lowering the interest rate to create more jobs, thereby decreasing unemployment. Second, currently, the mobile money business employs a lot of Ghanaian youths and serves many unbanked Ghanaian households. Thus, the Central Bank can regulate mobile money operations and use it as a medium to circulate money in the economy, thereby boosting aggregate demand and employment and eventually lowering unemployment. Thirdly, prudent and efficient management of inflation-targeting policy by policymakers is vital, as it has a negative impact on unemployment in the country. Originality/value Most studies on Ghana have mainly focused on the effect of monetary policy on inflation and growth. To our knowledge, no study has examined the impact of monetary policy on unemployment in Ghana. Our study fills the gap in the literature examining the effect of monetary policy on unemployment in Ghana. The findings of this study have important implications for monetary policy and fiscal policy for Ghana and other developing countries.