Assessing the impact of exchange rate volatility on economic growth in Ghana
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Date
2011
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Abstract
The effects of exchange rate volatility on economic growth have over the years been an issue for both policy makers and academicians on the efficiency of alternative exchange rate policies. Proponents of fixed exchange rate maintain that floating exchange rate is associated with excessive volatility and deviations from equilibrium values. They further argue that excessive volatility and deviations from equilibrium values have reduced economic growth through their effects on trade and investment. In contrast, those in favour of flexible exchange rate argue that exchange rates are mainly driven by other factors, and that changes in factors would require similar, but more abrupt, movements in fixed parities.
Also, exchange rate volatility has been found to have adverse effect on economic growth through international trade and investment. It has been found to have negative effects international trade, directly through uncertainty and adjustment costs and indirectly through its effects in allocation of resources and government policies. It can lead to the distortion of the relative prices of domestic resources which will adversely affect investment and production through reduced efficiency.The aim of this study was to look at the impact of exchange rate volatility on economic growth in Ghana using time series data covering the period 1983 – 2010. The standard deviation of the first difference of the logarithm of real exchange rate (VOL) was employed to estimate the real exchange rate volatility and cointegration and error correction models (ECM) were used to determine both the short and long – term relationships. The Cointegration tests suggest: (a) a significant short – term negative relationship between economic growth and exchange rate volatility in Ghana. (b) An insignificant long – term negative relationship between economic growth and exchange rate volatility in Ghana. This is as a result of the timely intervention by government in the exchange rate market by either buying or selling of foreign currencies. All the proxies of labour force, population and human development index showed a positive relationship with growth in Ghana indicating an efficient labour force, population and human development index. The results indicated that human development index with gross domestic investment, technology; exchange rate volatility explains growth in Ghana much better than when human development index is proxied by either labour force or population.
Policy makers, researchers and future research may find useful insights from the study.
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A Thesis submitted to the School of Graduate Studies, Kwame Nkrumah University of Science and Technology, Kumasi, in partial fulfilment of the requirements for the Degree of Master of Arts,