Real Exchange Rate And Economic Growth: Determining The Direction Of Impact In Ghana

The study examines the relation 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. The empirical result suggests that, there is a significant long run relationship between real exchange rate and economic growth and that real exchange rate impact positively on Gross Domestic Product. The result implies that an appreciation of real exchange rate improves economic growth; therefore adopting a suitable exchange rate policy towards its appreciation may help improve output capacity and achieve a higher economic growth. Importantly, the study also revealed that real exchange rate in Ghana operates through aggregate supply channel to impact economic growth. The study cautions against allowing real exchange rate appreciation to be sustained and long drawn in order to protect domestic industries from massive importation of goods. It is recommended 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.