Author Affiliation, Ana.
Department of Economics
Ghana's term structure of interest rates: effects and implications of monetary policy
IEA Policy Analysis
Date of Publication
Yield curves derived from both expected returns and risks are V-shaped. However, careful study of the different monetary regimes as defined by the tenures of three governors of the Bank of Ghana, indicate that yield curves during Agama's tenure were consistent but inverted; whereas yield curves during the tenure of Duffuor were inverted for expected returns and normal for risks; and yield curves duing Acquah's tenure is normal for expected returns and inverted for risks. Comprehensive empirical evidence from different estimated models indicate that slope coefficients explain the yield curves, and the insignificance of the intercept terms only confirm that the Expectation Theory (ET) exists in Ghana. The forecasting ability of the ET lends a conclusive added support to its relevance. Changes in operating targets defined by rediscount or bank rates and prime rates influence market interest rates as measured by the different short-term rates.The empirical evidence also suggests that financial innovations are crucial means for reducing the spread in the country. Additionally, the ET exists in the country because the securities market is shallow and market participation in short-term securities market is not active. There is also a need for government to undertake policies to deepen the financial market by encouraging wider public participation and to increase the activities of the securities market.....