Assessing The Effects Of Exchange Rate Volatility On Foreign Direct Investment In Ghana

Abstract

The study analyzed the effect of exchange rate volatility on foreign direct investment of Ghana. In order to achieve the purpose of the study, three objectives were stated. The first objective was to analyze the long run impact of exchange rate volatility on foreign direct investment of Ghana. The second objective of the study was to analyze the short run impact of exchange rate volatility on foreign direct investment of Ghana. Thirdly, the study objective was analyze the causal relationship between exchange rate volatility and foreign direct investment of Ghana. Control variables including Gross Domestic Product, interest rate, inflation rate and Investment Freedom. The annual data for exchange rate, interest rate, inflation, FDI, GDP and investment freedom were downloaded from WDI, IMF databank and GSE websites. Secondary data from 2000 to 2021 were employed. Unit root test was run to analyze the stationarity of the variables. ARDL was appropriate for the study. The Granger causality test was also used to analyze the causal relationship between exchange rate volatility and foreign direct investment. The study found that exchange rate inflation, and interest rate had a negative long run effect on foreign direct investment. GDP had no significant effect on foreign direct investment. In the short run, lag 1 of stock return was positive and significant on current foreign direct investment. Exchange rate had a negative and significant effect on foreign direct investment. Finally, the study found that there was a unidirectional causal relationship between foreign direct investment and interest rate, inflation and exchange rate. The study recommended that the central bank should put in measures to reduce the inflation rate.