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Exchange reform, parallel markets, and inflation in Africa : the case of Ghana

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  • Chhibber, Ajay
  • Shafik, Nemat

Abstract

This paper presents a theoretical framework to analyze the issue of exchange rate reform in the presence of parallel markets. In Ghana, which has carried out one of the most thorough structural adjustment programs in Africa, an increasingly high inflation rate has been attributed to major devaluations of the official exchange rate. The authors dispute this conclusion based on careful testing and simulations using a macroeconomic model estimated with Ghanaian data. This model also shows that there is no direct relationship between the official exchange rate and inflation. The results also show that official devaluation had a postive effect on Ghana's budget. Revenue improvements came from three channels: the higher grant aid disbursed at a more depreciated exchange rate, a reduction in the subsidies that had accrued to importers through an overvalued exchange rate, and an increase in export taxes as cocoa farmers increasingly marketed their output through official channels. The official devaluation therefore did not produce higher budget deficits, demand pressure did not spill onto the parallel market, and the exchange premium narrowed considerably. The key to the success of the program was the adequate level of foreign financing, combined with a coherent set of fiscal policies.

Suggested Citation

  • Chhibber, Ajay & Shafik, Nemat, 1990. "Exchange reform, parallel markets, and inflation in Africa : the case of Ghana," Policy Research Working Paper Series 427, The World Bank.
    • Handle: RePEc:wbk:wbrwps:427
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    References listed on IDEAS

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    Cited by:

    1. Chhibber, Ajay, 1991. "Africa's rising inflation : causes, consequences, and cures," Policy Research Working Paper Series 577, The World Bank.
    2. S.P. Jayasooriya, 2009. "A Dynamic Equilibrium between Inflation and Minimum Wages in Sri Lanka," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 3(2), pages 113-132, April.
    3. Carlos Barros & Luis Gil-Alana, 2013. "Inflation Forecasting in Angola: A Fractional Approach," African Development Review, African Development Bank, vol. 25(1), pages 91-104.
    4. Hector Carcel & Luis A. Gil-Alana, 2018. "Inflation analysis in the Central American Monetary Council," Empirical Economics, Springer, vol. 54(2), pages 547-565, March.
    5. M. O. Odedokun, 1997. "Dynamics of inflation in Sub-Saharan Africa: the role of foreign inflation, official and parallel market exchange rates, and monetary growth," Applied Financial Economics, Taylor & Francis Journals, vol. 7(4), pages 395-402.
    6. David Mautin Oke & Koye Gerry Bokana & Adebowale Soluade, 2017. "Re-examining Exchange Rate Regimes and Inflation Nexus: An ARDL Analysis for Nigerian Case," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 13(6), pages 253-266, DECEMBER.
    7. E. Tumusiime‐Mutebile, 1991. "Uganda: Contradictions of the IMF Programme and Perspective: A Comment," Development and Change, International Institute of Social Studies, vol. 22(2), pages 339-349, April.
    8. Morris, Stephen, 1995. "Inflation dynamics and the parallel market for foreign exchange," Journal of Development Economics, Elsevier, vol. 46(2), pages 295-316, April.
    9. Carlos P. Barros & Guglielmo Maria Caporale & Luis A. Gil-Alana, 2014. "Long Memory in Angolan Macroeconomic Series: Mean Reversion versus Explosive Behaviour," African Development Review, African Development Bank, vol. 26(1), pages 59-73, March.
    10. Francis Gyebi & Godfried K. Boafo, 2013. "Macroeconomic Determinants Of Inflation In Ghana From 1990 €“ 2009," International Journal of Business and Social Research, LAR Center Press, vol. 3(6), pages 81-93, June.
    11. Luis Alberiko Gil-Alana & Carlos Barros & Joao Ricardo Faria, 2014. "Inflation in Mozambique: empirical facts based on persistence, seasonality and breaks," Applied Economics, Taylor & Francis Journals, vol. 46(21), pages 2545-2555, July.
    12. Emmanuel Kwasi Mensah & Lawrence Adu Asamoah & Johnson Worlanyo Ahiadorme, 2021. "On the impact of exchange rate uncertainty on private investment in Ghana," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 208-217, January.

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