Determinants of exchange rate volatility in Ghana: Evidence from Glosten, Jagannathan and Runkle model and quantile regression.

Abstract

Exchange rate volatility is a major problem facing developing countries, especially Ghana. The issue of exchange rate volatility is too disturbing and over the years has become a source of great concern to policy analysts, policy makers and domestic as well as foreign investors. The study estimated the determinants of exchange rate volatility in Ghana using monthly data from 1990 to 2017. The study focused on interest rate, inflation rate, current account balance and money supply as the main determinants of exchange rate volatility in Ghana. In addition, the study was based on the positivism research paradigm, quantitative approach and used explanatory research design. Quantile Regression Model and Ordinary Least Square Regression Model were used to estimate the determinants of exchange rate volatility, and also to point out some differences among them. Exchange rate volatility was measured using the Glosten, Jagannathan and Runkle Model. The regression analysis revealed that interest rate, current account balance and money supply have negative and statistically significant effect on exchange rate volatility in Ghana. However, inflation rate exerts positive and statistically significant impact on exchange rate volatility in Ghana. The study also revealed that quantile regression model is robust than the classical ordinary least square regression model. In view of these findings, it is recommended that to stabilize exchange rate in Ghana, the central Bank of Ghana should increase interest rate on financial assets and maintain a low inflation rate. Also, the Bank of Ghana should put in place appropriate policies to improve the current account balance. Additionally, the Bank of Ghana must adopt a monetary policy mix that will help stabilize exchange rate in Ghana.