An Empirical Investigation into the effect of Monetary Policy and Inflation on the Exchange rate in Ghana
Year: 2019
Type: article
Abstract: The Ghanaian Cedi has recently experienced persistent depreciation against it's major trading partners. This paper investigates the role inflation and monetary policy plays in the persistent depreciation. The paper makes use of the ARDL and Bounds test of co-integration as well as the Toda & Yamamoto (1995) Augmented Granger Causality test to determine the long and short run dynamics of the impact of monetary policy and inflation on exchange rates in Ghana, using data ranging from 1970 to 2017. The paper finds short-run depreciation effect of contractionary monetary policy on the exchange rate, reflecting the exchange rate puzzle. The long run results however show an appreciating effect. Inflation is also found to depreciate the currency both in the short and long-run. The causality tests also reveal a bi-directional relationship between the exchange rate and the inflation rate, while a unidirectional causal relationship exists between monetary policy and the exchange rate. The paper recommends that inflation stabilization policies should be prioritized in Ghana, as a means to curb the rising exchange rates. Improvement in the terms of trade through export promotion should also be given the needed attention as this is found to appreciate the currency in the long-run.
Author: Precious Wedaga Allor
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2960715433