The effects of inflation,exchange rate,and interest rate on economic growth in Ghana

Abstract

Several studies have explored the impact of macroeconomic variables on economic growth. Such works have often established a significant relationship between these variables (Agyapong et‟al, 2016; Mensah and Okyere, 2015; Agalega and Antwi, 2013; Khan and Senhadji, 2011; Hausmann et‟al, 2005). The main purpose of this study is to find the effect of exchange rate, inflation, and interest rate on economic growth in Ghana. The general objective of the study is to determine if these three macroeconomic variables have a significant impact on economic growth. Using data from world development indicators (World Bank) for the period 1980 to 2015, the study applied autoregressive distributed lag model (ARDL) for the estimation of the model. The results revealed that exchange rate depreciation has a statistically significant positive impact on economic growth in the long-run and a negative and a statistically insignificant impact in the short-run. Unlike exchange rate, the study suggests a statistically insignificant effect of inflation on economic growth in the long-run but a negative and statistically significant impact in the short-run. Interest rate however exerted a negative and significant effect in both the long and short run. The study recommended that the Bank of Ghana (BoG) and the Ministry of Finance continue the implementation and reduction of the Monetary Policy Rate (MPR) and Inflation Targeting (IT) to very low levels practicably possible to stimulate investment. It also recommended that Ministry of Finance, Ministry of Trade, the Ministry of Food and Agriculture, the export promotion center, and the Ghana investment promotion center put programs and projects in place to encourage the processing and production of goods and services for the export market.