A re-examination of the exchange rate – interest rate differential relationship in Ghana

Isaac Kwesi Ofori and Mark Kojo Armah

MPRA Paper from University Library of Munich, Germany

Abstract: This paper revisits the exchange rate and interest rate differential relationship since Ghana adopted the inflation targeting regime. Using macro-data spanning 2002 to 2019 for Ghana and the United States, we show the nonexistence of the relationship in both the short-run and long-run. Further, we show a positive but slow responsiveness of exchange rate to interest rate differential shocks from the short-run to medium term. The long-run result however shows a case of a strong and significant response of exchange rate to interest rate differential shocks. We recommend that the Bank of Ghana address perennial macroeconomic instability, especially on inflation which we conjecture to fuel investment uncertainty and investment insensitivity to interest rate.

Keywords: Inflation Targeting; Exchange Rate; Impulse Response Function; Interest Rate Differential; VAR; Ghana (search for similar items in EconPapers)
JEL-codes: A1 E4 E43 E5 F3 F31 G21 (search for similar items in EconPapers)
Date: 2021-05-11
New Economics Papers: this item is included in nep-afr, nep-his, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:107586

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