The effect of exchange rate volatility on economic growth

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Abstract

This study aimed to investigate the connection between exchange rate volatility and economic growth in Ghana. The study applied descriptive statistical analysis, regression analysis, and correlation analysis to analyze the data spanning from the year 2000 to 2020. The study discovered that the actual exchange rate exhibits clustering volatility, which means that a period of large (small) fluctuations in the exchange rate shock is followed by large (small) fluctuations over a longer time. Negative correlations were found between exchange rate volatility and trade openness, government expenditure, money supply, foreign direct investment (FDI), output, and domestic credit to the private sector, among others. It was determined that exogenous variables such as terms of trade, domestic money supply, government expenditure, and capital flows affected exchange rate volatility over the long term, which was consistent with the findings of other studies (Rasheed, Ishaq, & Malik, 2022; Barguellil, Ben-Salha, & Zmami, 2018). The study also indicated that exchange rate volatility had a negative effect on economic growth. In all, most of the effects are felt at the end rather than in the short run. The government should encourage the diversification of industries by encouraging industrialization to boost export as a way of offsetting our huge imports. There must be a tightening of the monetary policy through raising interest rates to keep inflation at bay.

Keywords: Exchange Rate, Volatility, Economic Growth, Export, FDI

Authors’ individual contribution: Conceptualization — J.Y. and S.A.; Methodology — S.A.; Investigation — S.A. and K.K.L.; Resources — S.K.N.; Writing — K.K.L.; Supervision — J.Y.; Funding — J.Y. and S.K.N.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: E60, F31, F42, F62

Received: 05.07.2022
Accepted: 30.11.2022
Published online: 02.12.2022

How to cite this paper: Yensu, J., Nkrumah, S. K., Amankwah, S., & Ledi, K. K. (2022). The effect of exchange rate volatility on economic growth. Risk Governance and Control: Financial Markets & Institutions, 12(4), 33–45. https://doi.org/10.22495/rgcv12i4p2