Effect of exchange rate pass through on domestic price levels in Ghana

Abstract

The main purpose of this study was to examine the effect of exchange rate (Cedi to the Dollar) movement on the prices of domestic goods and services in Ghana using time series over the period 2005 to 2015. The quest to conduct this study was to enable an estimation of the rate of any pass-through, and its proportionality to inflation levels in Ghana using exchange rate, interest rates, and monetary policy rate. The study was to establish the effect of exchange rate, interest rates and monetary policy rates on domestic price levels. The study employed a causal research design. The data set for all variables were sourced from World Bank-World Development Indicators Database (Online Edition). Vector Auto Regressive (VAR) model was used in estimating the significant positive effects of the independent variables (exchange rates, interest rate and monetary policy rate) on the dependent variable (inflation rate). The study revealed that there was a statistically significant positive effect of exchange rate, interest rate, and monetary policy rate on domestic price levels. In conclusion, when the cedi depreciates against the dollar, inflation hikes will be experienced. It is recommended that Bank of Ghana ensure a stable exchange rate in order to reduce its potential effect on inflation in Ghana