Money Demand and Monetary Policy in Ghana (1979-2010)

CHAPTER ONE
INTRODUCTION
1.0 Background of the Study
Prior to the introduction of money as a medium of exchange, the barter system was responsible for exchange between demanders of commodities and suppliers of these commodities. Despite the problems of the barter system, it worked sufficiently with both demand and supply forces until the introduction of money. Because money is also like any commodity, the demand for money and supply of money are real forces that help promote efficiency in any system that uses the price mechanism, since most prices are quoted in monetary units.

Nelson (2011) describes the demand for money not as the amount one wishes to have but as the amount of one’s wealth that is preferable in the form of currency or demand deposits. Because the demand for money is the demand for wealth held in the liquid form of money, Keynes (1936) identified three motives for holding money; the transactionary, the precautionary and the speculative motives. To encompass all these motives, Pomeyie (2001) identifies the demand for money as a function of income, interest rates on wealth bearing assets and the price level.

An institution that is designed to oversee the banking system and regulate the quantity of money in the economy is known as a Central Bank (Mankiw, 2001). In Ghana, the central bank is the Bank of Ghana (BOG) and its major functions include the maintenance of monetary stability of the economy (BOG, 2011). Policies are instruments used by the central bank to veer the economy into the direction it may believe is best. That policy which is used by the central bank to regulate money supply is known as Monetary policy (Pomeyie, 2001). BOG’s policy regarding money is to set an interest rate considering a target of inflation with a broad objective of growth (BOG, 2011).
Stable money demand functions inform the central bank’s use of monetary policy in order to ensure that there is monetary stability in the economy. Monetary stability would refer

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