The Determinants Of Real Exchange Rates Fluctuations For Ghana

The study examined the main determinants of real exchange rates fluctuations in Ghana using the Autoregressive Distributed Lag (ARDL) approach [bound testing approach] and vector error correction model with annual time series data covering the period of 1970 to 2014. The findings from the study revealed that whereas increase in inflation rate, trade openness and government consumption expenditure cause the cedi to depreciate against the US dollar, an increase in real GDP growth was found to appreciate the cedi against the US dollar. Based on these findings, the study suggested these recommendations to enhance the performance of the cedi against the US dollar. First, the Bank of Ghana, Ministry of Finance and Ministry of Food and Agriculture should adopt policies that will reduce inflation and increase real GDP growth. These policies include increase in food production, reduction of interest rates and corporate tax and increase privatisation. Again, the Ministry of Trade and Industry should encourage exports and discourage importation of basic consumer goods such as rice, tin tomatoes, chocolate etc. so as to prevent trade openness from depreciating the cedi. Finally, government consumption expenditure should target areas that will enhance productivity. For instance, the government can increase its spending on power generation, education and health.