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Exchange rate pass-through to consumer prices in Ghana: Evidence from structural vector auto-regression

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  • Sanusi, Aliyu Rafindadi

Abstract

This paper develops a Structural Vector Autoregression (SVAR) model for the Ghanaian economy to estimate the pass-through effects of exchange rate changes to consumer prices. The model incorporates the special features of the Ghanaian economy, especially its dependence on foreign aid and primary commodity exports for foreign exchange earnings. The findings show that the pass-through to consumer prices, although incomplete, is substantially large. This suggests that exchange rate depreciation is a potentially important source of inflation in Ghana. Using variance decomposition analyses, it is found that monetary expansion has been more important in explaining Ghana’s actual inflationary process than the exchange rate depreciation. One policy implication of these findings is that policies that aim at lowering inflation must focus on monetary and exchange rate stability.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29491.

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Date of creation: Jun 2010
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Publication status: Published in The West African Journal of Monetary and Economic Integration 1.10(2010): pp. 25-54
Handle: RePEc:pra:mprapa:29491

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Keywords: Exchange Rate Pass-Through; Inflation; Structural Vector-Autoregression; Foreign Aid; Ghana;

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References

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  1. Engel, Charles, 2000. "Long-run PPP may not hold after all," Journal of International Economics, Elsevier, vol. 51(2), pages 243-273, August.
  2. Maurice Obstfeld & Kenneth Rogoff, 1996. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
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Cited by:
  1. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2205-2221.

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