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Exchange Rate Pass-through to Prices : Bayesian VAR Evidence for Ghana

Author

Listed:
  • Asafo, Shuffield Seyram

Abstract

Using quarterly data from 2006q3 to 2017q4, this paper employed sign restrictions with rejection method in a Vector Autoregression to estimate the pass-through of exchange rate dynamics to domestic prices in Ghana. The priors of the model belongs to the flat Normal inverted-Wishart family. Markov Chain Monte Carlo (MCMC) is used to collect 1000 draws from the posterior distribution of the SVAR parameters that satisfy the sign restrictions. The model specification included some idiosyncratic features of the Ghanaian economy such as the dependence on primary export commodities for foreign exchange revenue and the dependence on foreign aid. Impulse response functions was used to analyze exchange rate pass-through whilst variance decomposition was used to explain the most dominant source of inflation in the study sample. The impulse response showed a fairly large but not unitary pass-through of exchange rate dynamics to domestic prices. The implication herein is that exchange rate depreciation led to upsurge in prices in Ghana albeit, the impact is incomplete. Results from the variance decomposition indicated a monetary expansion was most dominant in explaining inflationary pressures in Ghana. For inflation to be lowered, policy directives should be geared towards exchange rate stability as well as ensuring a stable interest rate environment.

Suggested Citation

  • Asafo, Shuffield Seyram, 2019. "Exchange Rate Pass-through to Prices : Bayesian VAR Evidence for Ghana," MPRA Paper 92967, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:92967
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    File URL: https://mpra.ub.uni-muenchen.de/92967/1/MPRA_paper_92967.pdf
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    References listed on IDEAS

    as
    1. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2005. "Large Devaluations and the Real Exchange Rate," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 742-784, August.
    2. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
    3. Jonathan McCarthy, 2007. "Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 511-537, Fall.
    4. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series 5, Central Bank of Brazil, Research Department.
    5. Ashok Bhundia, 2002. "An Empirical Investigation of Exchange Rate Pass-Through in South Africa," IMF Working Papers 02/165, International Monetary Fund.
    6. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
    7. Michael B. Devereux & Charles Engel, 2001. "Endogenous Currency of Price Setting in a Dynamic Open Economy Model," NBER Working Papers 8559, National Bureau of Economic Research, Inc.
    8. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
    9. repec:pkp:ijobem:2019:p:39-48 is not listed on IDEAS
    10. Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 614-639, June.
    11. repec:tei:journl:v:11:y:2018:i:3:p:65-72 is not listed on IDEAS
    12. Marco Rossi & Daniel Leigh, 2002. "Exchange Rate Pass-Through in Turkey," IMF Working Papers 02/204, International Monetary Fund.
    13. Matuka, Adelajda & Asafo, Shuffield Seyram, 2018. "External Debt and Economic Growth in Ghana: A Co-integration and a Vector Error Correction Analysis," MPRA Paper 90463, University Library of Munich, Germany, revised 04 Nov 2018.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Exchange Rate Pass-through; Monetary policy; Inflation; Structural Vector Autoregressive; Bayesian Analysis;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F3 - International Economics - - International Finance

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