The effect of real exchange rate on economic growth in Ghana

Interest rate is the closely watched variable in the economy, their movements are reported almost daily by news media because they directly affect our everyday lives and have important consequence for the health of the economy and it is important macroeconomic variables for economic growth, they affect personal decisions such as whether to consume or to save, whether to buy a house and whether to purchase bonds or put funds into a saving account. This paper investigates the effects of real exchange rate on economic growth in Ghana over the period 1975 to 2015 using quarterly time series data. Specifically, it examines the extent to which real exchange rate has on the growth rates of the country reflecting real GDP, inflation rate and interest. The study, therefore, employs the co-integration analysis within the framework of Vector Autoregressive (VAR) to empirically investigate the effects of real exchange rate on real GDP growth in the country. The study found long-run relationships among the variables. The results also indicated that within the past one year and two years, inflation rate and interest rate had negative impacts on the growth of real GDP in Ghana respectively while within the past one year, real exchange rate had a positive effect on the real GDP in Ghana. Further, the study found feedback effects among the variables. Further, the study found feedback effects among the variables. The Granger Causality test also showed unidirectional causality running from inflation rate and interest rate to real GDP and bi-directional causality from both real exchange and money supply and real GDP. This study, therefore, recommends that the Bank of Ghana and government of Ghana put in measures which are geared towards stabilising these policy variables especially real exchange rates as they are capable of influencing the country’s economic performance both in the short and long run.