Effect of Exchange Rate Volatility and its Transmission Pathways on Economic Growth in Post Exchange Rate Liberalization Ghana

Abstract

Exchange rate volatility is a major concern for local and foreign investors. Its impact on economic growth has been widely documented in literature. In this paper, we model exchange rate volatility using GARCH (1,1) and analyze its impact on economic growth in Ghana, with a particular focus on the post exchange rate liberalization period, 1990-2019. Additionally, this paper assesses the pathways through which exchange rate volatility affects economic growth. By employing the autoregressive distributed lagged (ARDL) model, we find evidence that exchange rate volatility has a negative impact on economic growth in Ghana. In addition, inflation and interest rates are significant transmission pathways through which exchange rate volatility impact growth in post exchange rate liberalized Ghana. The paper thus suggests the implementation of policies aimed at curbing excessive and rapid fluctuations in the exchange rate. In addition, the Central Bank must embark on more inflation-targeting policies aimed at stabilizing the local currency to attract foreign direct investment.