Foreign aid and the Dutch disease: Evidence from Ghana

Abstract

The study sought to test the hypothesisthat foreign aid flows generate “Dutch Disease” in the recipient country which in this case is Ghana. Annual data covering the period 1983 to 2010 was collected and interpolated into quarterly seriesfor the analysis of the study. The outcome of the study showed thatforeign aid as well as government expenditure, real GDP and money supply had an appreciating effect on real exchange rate where as trade openness and terms of trade exert depreciating effects on real exchange rate. In the export model we demonstrated that an increment in foreign aid is detrimental to exports. Also appreciation of real exchange rate causes reduction in export.We established from the variance decomposition and impulse response functions that foreign aid is an importance determinant of both real exchange rate and exports.