Effects of Exchange Rate, Inflation and Interest Rate on Economic Growth in Ghana

Abstract

ABSTRACT This study therefore investigates the effect of Ghana’s exchange rate, inflation, and interest rate on economic growth over the period 1980 to 2015 using quarterly time series data. It examines the extent to which exchange rate policy have been able to contribute to lowering the probability of currency and banking crises, ensuring sustainable internal and external balance, and containing inflation and interest rate. Given the political economy, more openness, the structural wage-price processes, the degree of backward and forward looking behavior in the Ghanaian economy, the paper draws out implications for macroeconomic policy. The paper employs the Johansen’s co integration analysis within the framework of Vector Autoregressive (VAR) to empirically investigate the effects of rate of exchange, inflation and interest rateon economic growth since the adoption of floating exchange rate regime in the country. The results indicated that, the past one year of inflation rate and the past two years of interest rate had negative impacts on the growth of real GDP in Ghana respectively while the past one year of exchange rate, had a positive impact on the growth of real GDP in Ghana.The Granger Causality test also indicated bi-directional causality between exchange rate and real GDP, unidirectional causality between inflation, interest rate and GDP. The study therefore clearly recommends that the government of Ghana and Bank of Ghana intensify their efforts stabilising these policy variables as they are capable of influencing the country’s macroeconomic policy decisions in both short and long run.