Determinants of exchange rate threshold effect on economic growth. Evidence from Ghana

Purpose - The exchange rate is an important driver of a country’s economic growth, influencing trade, investment, inflation, and employment. This study’s main objective was to investigate the threshold effects of exchange rates on economic growth. Design/methodology/approach - In this research, innovative endogenous threshold autoregressive (TAR) models introduced by Hansen (2000) are employed for estimation and inference. The dataset comprises secondary annual time series data from Ghana, covering thirty-one years from 1990 to 2021. Economic growth is represented by GDPPC, with the growth exchange rate serving as the crucial threshold variable. Findings - The finding suggests a single exchange rate threshold for Ghana, indicating a nonlinear relationship with economic growth. However, above 8.97%, the exchange rate considerably slows growth, harming the economy. The exchange rate negatively influences growth in both low and high-exchange-rate regimes, but it is insignificant in the high regime. In addition, inflation has a significant negative influence on growth in the low regime but a positive impact on the high regime. In contrast, interest rates positively impact growth in both regimes, though not as significantly in the high regime. Practical implications - The findings from this study offer valuable insights to the Ghanaian government and policymakers as they consider choosing an exchange rate target that helps minimise the negative impact of a high exchange rate to promote economic growth. Originality/value - This paper is remarkable for being one of the few studies that have explored the relationship between exchange rates and economic growth, exploring the threshold effect.