Effect of Exchange Rate Volatility on Economic Growth in Ghana

Abstract

Volatility is an innate feature of the exchange rate and economic theory suggests that exchange fluctuations have implication for the rate of growth of the economy. This study there examined the long run and the short run effect of exchange rate movement on the economic growth of Ghana by employing data from 1980 to 2018 and using the vector autoregressive model and the ordinary least square regression to investigate the relationship. The trend analysis from the exchange rate and economic growth data revealed a linear trend between exchange rate movement and economic growth in Ghana. The study found that exchange rate movement in Ghana is mainly a negative shock and during periods of significant depreciations, the economic growth experienced a sharp fall. The study further revealed that exchange rate volatility and economic growth are negatively related in both the short run and the long run. The study drew the conclusion that currency depreciation is characteristic of the Ghanaian cedi and the cedi depreciation slows down the growth of the economy in both the short run and the long run. The study recommended that the Government of Ghana and the Bank of Ghana employ short term to long term strategies such as restriction of import, increase in production, denominating and undertaking transaction in the local currency, and improving macroeconomic variables such as inflation and money supply to stabilize the cedi. This result of this study therefore has relevance for the Bank of Ghana, Government of Ghana, and the research community at large.