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The impact of macroeconomic variables on exchange rate volatility in Ghana: The Partial Least Squares Structural Equation Modelling approach

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  • Adusei, Michael
  • Gyapong, Eddie Yaw

Abstract

This paper employs the Partial Least Squares Structural Equation Modelling approach to analyse the impact of inflation, monetary policy rate, current account balance, money and quasi money supply per GDP, annual GDP growth rate and the total external debt on the Cedi to the US dollar exchange rate in Ghana with data spanning 1975–2014. The results show that the macroeconomic variables explain 82% of the adjusted variance in the cedi-dollar exchange rate with monetary policy rate, inflation and current account balance contributing 8.2%, 10.5% and 19.2% respectively. Money and quasi money supply per GDP, total external debt and annual GDP growth rate contribute 15%, 14.9% and 15.1% respectively to the explained variance in cedi-dollar exchange rate. Whereas monetary policy rate, inflation and current account balance have negative relationships with the cedi-dollar exchange rate, money and quasi money supply per GDP, total external debt and annual GDP growth rate have positive relationships with the cedi-dollar exchange rate. These results underpin the conclusion that inflation, monetary policy rate, current account balance, money and quasi money supply per GDP, annual GDP growth rate and the total external debt are significant predictors of the cedi-dollar exchange rate in Ghana.

Suggested Citation

  • Adusei, Michael & Gyapong, Eddie Yaw, 2017. "The impact of macroeconomic variables on exchange rate volatility in Ghana: The Partial Least Squares Structural Equation Modelling approach," Research in International Business and Finance, Elsevier, vol. 42(C), pages 1428-1444.
    • Handle: RePEc:eee:riibaf:v:42:y:2017:i:c:p:1428-1444
    DOI: 10.1016/j.ribaf.2017.07.081
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