Abstract:
"The need for the government to maintain macroeconomic stability is
becoming increasingly crucial in the era of slow economic growth, growing
unemployment and high debt. However, the trend of Balance of Payment over the
years reveals an unstable pattern. One key factor that has been overlooked in terms
of the determinants of Balance of Payment is exchange rate volatility. Coming from
the background of volatility/instability in the Ghana’s exchange rate, could it be the
reason for the instability in the trend of Balance of Payment? This question is
essentially the subject matter of this study. In order to estimate the effect of
exchange rate volatility on Balance of Payment, the Auto Regressive Distributed
Lag (ARDL) technique was employed after the yearly exchange rate volatility had
been calculated using the GARCH approach.
The results of the study suggest that exchange rate volatility has a deleterous
effect on Balance of Payment both in the short run and long run but the effect is
more pronounced in the long run than the short run. Moreover, with the exception
of inflation which was only significant in the short run, GDP growth and interest
rate all had a favourable effect on Balance of Payment in both short run and long
run. The study recommends that Bank of Ghana intensifies its exchange rate
stabilization measures to reduce the exchange rate risk imposed on trade players. "
