Exchange rate and inflation dynamics: does the month or quarter of the year matter?

Williams Ohemeng (), Elvis Kwame Agyapong () and Kenneth Ofori-Boateng ()
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Williams Ohemeng: SOLASS, GIMPA
Elvis Kwame Agyapong: Department of Accounting and Finance, GIMPA Business School
Kenneth Ofori-Boateng: Department of Accounting and Finance, GIMPA Business School

SN Business & Economics, 2021, vol. 1, issue 6, 1-24

Abstract: Abstract This study examines whether there exists variation in the rate of changes in monthly currency exchange and inflation rates for the various months and quarters of the year. Monthly data were sourced from the time series data portal of Bank of Ghana and Ghana Statistical Service for USD/GHS rate and headline inflation respectively from March 1992 to December 2018. The study employs t-test, OLS regression and GARCH modelling techniques. The results indicate that over the period of the study, inflation was stable with insignificant changes observed between the various months and quarters of the year. For exchange rate however the changes were significant, with quarter 2 having the highest rate of change, followed by quarters 1, 4 and 3 in that order. The analyses also support the exchange rate pass-through in the long run as against the short-run since the changes observed between the two macroeconomic variables do not move in one direction at the same point in time. Both the exchange and inflation rates also displayed explosiveness in volatility shocks over the course of the period under study. Whilst the study confirmed the existence of leverage effect for the conditional volatility of monthly rate of inflation, we could not confirm same for conditional volatility of monthly exchange rate. With this information, businesses, households and policy makers in planning their yearly activities are to consider the observed trend of fluctuations in inflation and exchange rates. Accordingly, businesses should reformulate their strategies to time their international trading activities and payments to gain or mitigate against losses from the forex market. Policy makers could give guaranteed rates to such businesses and use this as a guide for managing their foreign reserves.

Keywords: Exchange rate and inflation dynamics; IGARCH modeling technique; Pass-through effects; Ghana (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s43546-021-00074-5

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