The study examines the relationship between the real exchange rate and economic growth in Ghana with emphasis on the channel through which the impact is transmitted by using an annualized data from 1980 to 2010. The long run and short run dynamics of the variables of interest are captured by estimating an error correction model using Johansen cointegration approach. Empirical results obtained suggest that there is a significant long run relationship between real exchange rate and economic growth and that real exchange rate impacts positively on gross domestic product. This implies that an appreciation of real exchange rate improves economic growth. Therefore, adopting a suitable exchange rate policy may help improve output capacity and achieve a higher economic growth. Importantly, the study also reveals that real exchange rate in Ghana operates through aggregate supply channel to impact economic growth. Based on the results obtained from the study, we recommend against allowing real exchange rate appreciation to exceed the equilibrium rate. Our recommendation is aimed at protecting domestic industries from massive importation of goods. Additionally, we recommend that fiscal, monetary and exchange rate policies be designed to ensure sustainable and suitable macroeconomic stability which would stimulate real appreciation of the exchange rate in order to enhance economic growth.
"Real Exchange Rate and Economic Growth: Determining the Direction of Impact in Ghana,"
Annals of Management Science: Vol. 1
, Article 7.
Available at: http://digitalscholarship.tnstate.edu/ams/vol1/iss1/7