TAYLOR RULE AND MONETARY POLICYMAKING IN SUB-SAHARAN AFRICA

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.