Exchange Rate Policy and GDP growth in Ghana

Abstract

The study aims at examining the relationship between exchange rate policy (adjustment) and GDP growth in Ghana. The Auto Regressive Distributed Lag (ARDL) method was used to compare the effects of devaluation on GDP growth in short run and long run periods in the economy of Ghana. The findings revealed that both the long run and short run devaluations of the cedi have improved the economy, but the impact is low. The long run nominal exchange rate coefficient of -0.23624 means a 1% devaluation of the cedi will result in 0.23624% improvement in GDP. Also the research shows that both the long run and the short run depreciation of the cedi have impacted positively on the economy, but low. The long run co-efficient of -0.25231 means a 1% depreciation of the cedi will result in 0.25231 increase in GDP.  In the ECM model for fixed exchange rate, the speed of adjustment of -0.62131 is quite high. The coefficient of -0.62131 implies that it will take less than 2 years for disequilibrium in the dynamic (short run) model to be restored. Also in the ECM model for flexible exchange rate the speed of adjustment is quite high. The co-efficient of -0.53211 means it will take less than 2 years for disequilibrium in the dynamic model to be restored. The findings suggest that reduction in the value of the cedi, either through devaluation or depreciation has impacted positively on GDP growth, but low. The following policy recommendations are suggested to put the economy onto a sustainable growth path;                                                                To improve upon macroeconomic performance (GDP growth), it is highly recommended that the government should embark on policies aim at boosting output in the various sectors of the economy namely agriculture, industry and tertiary. Micro credit, irrigation, storage facilities should be made available to farmers in order to increase their output. In short the government should strengthen and diversify production capacity.