Abstract:
Using annual time series data from the years 1987 to 2021, the study examined
the symmetric and asymmetric effects of foreign direct investment and
External debt on exchange rate volatility in Ghana. The effect of foreign direct
investment (FDI) and External debt on exchange rate volatility in Ghana was
investigated using the Linear Autoregressive Distributed Lag (LARDL)
model. The study went ahead to examine a possible asymmetric effect of FDI
and external debt on exchange rate volatility in Ghana using the Nonlinear
Autoregressive Distributed Lag (NARDL) model. The results obtained from
the LARDL model concluded that there is a negative effect of FDI and
External debt on exchange rate volatility in the long run. The estimate of the
NARDL model revealed that there is an asymmetric effect of FDI on the
exchange rate volatility in the long run. However, there was an asymmetric
effect of both FDI and External debt on exchange rate volatility in the short
run. The study recommended that the government strengthens its regulatory
frameworks to effectively manage the level of outflows, given that the decline
in foreign direct investments (FDIs) is observed to have increasingly negative
consequences. Also, it is crucial for Ghana to carefully manage its external
debt levels. Strive for a sustainable debt profile by diversifying funding
sources, monitoring debt-servicing obligations, and ensuring that borrowed
funds are utilized efficiently in productive sectors that generate long-term
economic benefits.
