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On the Causes and Effects of Exchange Rate Volatility on Economic Growth: Evidence from Ghana

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  • Paul Alagidede
  • Muazu Ibrahim

Abstract

What drives exchange rate volatility, and what are the effects of fluctuations in the exchange rate on economic growth in Ghana? These questions are the subject matter of this study. The results showed that while shocks to the exchange rate are mean reverting, misalignments tend to correct very sluggishly, with painful consequences in the short run as economic agents recalibrate their consumption and investment choices. About three quarters of shocks to the real exchange rate are self-driven, and the remaining one quarter or so is attributed to factors such as government expenditure and money supply growth, terms of trade and output shocks. Excessive volatility is found to be detrimental to economic growth; however, this is only up to a point as growth-enhancing effect can also emanate from innovation, and more efficient resource allocation.

Suggested Citation

  • Paul Alagidede & Muazu Ibrahim, 2017. "On the Causes and Effects of Exchange Rate Volatility on Economic Growth: Evidence from Ghana," Journal of African Business, Taylor & Francis Journals, vol. 18(2), pages 169-193, April.
    • Handle: RePEc:taf:wjabxx:v:18:y:2017:i:2:p:169-193
    DOI: 10.1080/15228916.2017.1247330
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    References listed on IDEAS

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    1. Kozo Kiyota & Shujiro Urata, 2004. "Exchange Rate, Exchange Rate Volatility and Foreign Direct Investment," The World Economy, Wiley Blackwell, vol. 27(10), pages 1501-1536, November.
    2. Straub, Roland & Tchakarov, Ivan, 2004. "Non-fundamental exchange rate volatility and welfare," Working Paper Series 328, European Central Bank.
    3. Barry Eichengreen, 2008. "The Real Exchange Rate and Economic Growth," World Bank Publications - Books, The World Bank Group, number 28013.
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