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Assessing Ghana’s Trade Competitiveness: A Computation of Multilateral Real Exchange Rate Index

Akosah, Nana and Mireku, Providence and Omane-Adjepong, Maurice (2017): Assessing Ghana’s Trade Competitiveness: A Computation of Multilateral Real Exchange Rate Index.

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Abstract

We assess Ghana’s trade competitiveness against its major trading partners. In doing so, we compute the real effective exchange rate (REER) index using total trade weighted for the period 2006-2012. The paper further evaluates the volatility of REER and the extent to which variations are ascribed to either the relative price or nominal exchange rate. The findings indicate annual appreciation of the REER in 2001, 2003-2006, 2008, 2010-2011 and 2015-2016. In contrast, real depreciation was recorded for the periods 2002, 2007, 2009 and 2012-2014. These developments in the REER largely mirrored trends in Ghana’s trade balance and supports the notion that real depreciation (appreciation) improves (worsens) trade balance (trade competitiveness). We further observed a strong positive pass-through of nominal exchange rate to real exchange rate, while the impact from price differentials was relatively small. This finding suggests that despite the perceived moderate pass-through of nominal depreciation to domestic prices, dynamics in the nominal exchange rate remain critical for Ghana’s trade competitiveness. Consequently, this paper assigns higher priority to nominal exchange rate stability to attain the desired level of real exchange rate alongside moderating volatilities in other macroeconomic variables.

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