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Abstract

In recent years, many central banks around the world have shifted from frameworks such as monetary targeting and exchange rate targeting to inflation targeting to achieve price stability and enhance central bank credibility. The same pattern has been observed in Sub-Saharan Africa (SSA), where the number of inflation-targeting countries has increased from 1 in 2000 to 5 in 2022, as countries continue to exit other frameworks, especially the monetary targeting regime. However, there is an ongoing debate in SSA regarding which monetary policy framework is most effective in achieving macroeconomic stability and promoting long-term growth. Following that, this study investigated the relative effectiveness of monetary policy in Sub-Saharan African (SSA) countries that employ exchange rate targeting, monetary aggregates targeting, and inflation targeting frameworks. A panel fixed-effects model with Driscoll–Kraay standard errors was used to analyse the effectiveness of monetary policy frameworks in SSA on price stability. The study reveals that the efficacy of monetary targeting in controlling prices appears to decline gradually as financial sector developments in Sub-Saharan Africa unfold, thereby weakening the link between monetary aggregates and prices. However, inflation targeting, when paired with alternative regimes, becomes increasingly favourable, particularly in the presence of fiscal surpluses, as it more effectively stabilises inflation. The findings suggest that Central Banks in SSA should prioritize an inflation targeting framework to maximise the probability of price stability. However, the successful implementation of the inflation targeting framework requires strong technical capacity and institutional foundations. These include building a strong capacity in communication strategies, forecasting techniques, and macroeconomic analysis. Also, guaranteeing de facto central bank independence is necessary to minimise the time-inconsistency problem.

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