Exchange rate, interest rates, inflation rate and gross domestic production (GDP) in Ghana

Abstract

This study aimed at examining the effects of exchange rate, interest rate and inflation rate on Gross Domestic Product in Ghana between the periods of 1990 to 2015. Quarterly Data was collected from the World Bank Development Indicators and Bank of Ghana websites. The research made use of the Autoregressive Distributed Lag and Vector Error Correction Model for data estimation and analysis using the E-views 9.0 package. The results for the study showed that there exist significant effects of the exchange rate, interest rate and inflation rate on GDP in Ghana. This implies that, the variable are highly related and change in any of the variables would have an impact on the GDP of Ghana. From the Vector Error Correction Model, all the variables were significant with the exception of Foreign Direct Investment (FDI), using the rule of the thumb. The real effective exchange rate was found to have a negative effect on GDP in the long run analysis. Interest rate (MPR) which is also an explanatory variable had a negative impact on GDP. Inflation also recorded a negative effect on GDP. In addition, other control variables introduced name; gross fixed capital formation, household consumption and Government expenditure all had a positive effect on the GDP. The study recommends that stakeholders in macroeconomic planning take into serious account the dynamics and consider the effects of all the variable that matter on the GDP of the country. In order to achieve this, the key players in the formulation of macro-economic policies will have to take into account, the various effect of the variables namely, exchange rate, interest rate, inflation rate, Government expenditure, household consumption and gross fixed capital formation on GDP of Ghana.