Exchange Rate Fluctuations and Domestic Investment in Ghana

Abstract

Exchange rate fluctuations is one of the critical determinants of domestic investment. Though exchange rate fluctuations can have an asymmetric effect on domestic investment, other studies assumed a symmetric relationship between these variables. Using an annual data from the period of 1980-2017, the Nonlinear Autoregressive Distributed Lag model (NARDL) was used to investigate the asymmetric effect of exchange rate fluctuation on domestic investment by creating two new variables to substitute exchange rate fluctuation (appreciation and depreciation variables). The Linear Autoregressive Distributed Lag (LARDL) model was use to examine the effect of income on domestic investment. The first objective confirmed the asymmetric effect of exchange rate fluctuations on domestic investment; the second objective also showed that income has a positive effect on domestic investment. The other explanatory variables included in the study were foreign direct investment, interest rate differential and they were found to be detrimental to domestic investment while domestic credit to the private sector had a positive effect on domestic investment. The study recommends that the Bank of Ghana should put in place long-lasting, effective and efficient measures to stabilise the exchange rate.