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EXAMINING THE EFFECT OF REAL EFFECTIVE EXCHANGE RATE VOLATILITY ON ECONOMIC GROWTH: EVIDENCE FROM GHANA

ABSTRACT

This study hypothesizes that real effective exchange rate volatility is deleterious to economic growth in Ghana. To test this relationship, the study uses the Fully Modified Ordinary Least Squares (FMOLS) econometric approach and an annual times series data spanning from 1980-2015. Our estimated regression results show that real effective exchange rate volatility has a negative and highly statistically significant effect on economic growth in Ghana. In addition, we estimated models with traditional control variables as well as a novel measure of financial market fragility and still have consistent results. The study recommends that strong policies towards building an economy that is internationally competitive should be pursued by the country. It will help promote Ghana’s exports and ease the degree of its exchange rate volatility.

Keywords: Volatility, Exchange Rate, Fragility, Growth, FMOLS, Ghana.