Exchange rate pass-through to consumer prices in Ghana: Evidence from structural vector auto-regression

Sanusi, Aliyu Rafindadi (2010): Exchange rate pass-through to consumer prices in Ghana: Evidence from structural vector auto-regression. Published in: The West African Journal of Monetary and Economic Integration , Vol. 10, No. 1 (July 2010): pp. 25-54.

Abstract

This paper develops a Structural Vector Autoregression (SVAR) model for the Ghanaian economy to estimate the pass-through effects of exchange rate changes to consumer prices. The model incorporates the special features of the Ghanaian economy, especially its dependence on foreign aid and primary commodity exports for foreign exchange earnings. The findings show that the pass-through to consumer prices, although incomplete, is substantially large. This suggests that exchange rate depreciation is a potentially important source of inflation in Ghana. Using variance decomposition analyses, it is found that monetary expansion has been more important in explaining Ghana’s actual inflationary process than the exchange rate depreciation. One policy implication of these findings is that policies that aim at lowering inflation must focus on monetary and exchange rate stability.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange Rate Pass-Through, Inflation, Structural Vector-Autoregression, Foreign Aid, Ghana
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Atta-Mensah, J. and M. Bawumia (2003). "A Simple Vector Error Correction Forecasting Model for Ghana." Bank of Ghana Working Paper WP/BOG-2003/01.

Bawumia, M. and P. Abradu-Otoo (2003). "Monetary Growth, Exchange Rates and Inflation in Ghana: An Error Correction Analysis." Bank of Ghana Working Paper WP/BOG-2003/05.

Bernhofen, D. and P. Xu (2000). "Exchange Rates and Market Power: Evidence from the Petrochemical Industry." Journal of International Economics 52(2): 283-297.

Betts, C. and M. B. Devereux (1996) "The Exchange Rate in a Model of Pricing-to-Market." European Economic Review 40: 1007-1021

Betts, C. and M. B. Devereux (2000). "The Exchange Rate Dynamics in a Model of Pricing-to-Market." Journal of International Economics 50(4): 215-244.

Bhundia, A. (2002). "An Empirical Investigation of Exchange Rate Pass-through in South Africa." IMF Working Paper 165.

Buffie, E., C. Adam, S. O’connell and C. Pattillo (2004). "Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa." IMF Staff Papers 51(Special Issue).

Campa, J. M. and L. S. Goldberg (2005). "Exchange Rate Pass-through into Import Prices." The Review of Economics and Statistics 87(4).

Chaoudhri, E. and D. Hakura (2001). "Exchange Rate Pass-through to Domestic Price: Does Inflation Environment Matter." IMF Working Paper 01/194.

Devereux, M. B. and C. Engel (2001). "Endogenous Currency of Price Setting in a Dynamic Open Economy Model." NBER Working Paper w8559.

--- (2003). "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility." The Review of Economic Studies 70: 765-783.

Devereux, M. B and J. Yetman, (2003) Price Setting and Exchange Rate Pass-Through : Theory and Evidence. Hong Kong, School of Economics & Finance the University of Hong Kong.

Enders, W. (2004). Applied Econometric Time Series, John WIley & Sons, Inc.

Engel, C. (1996) "Long-Run PPP May Not Hold after All", NBER Working Paper no. W5646.

Froot, K and P. Klemperer (1989), “Exchange Rate Pass-through When Market Share Matters”, American Economic Review, 79( 4), September, 637-654.

Frimpong, Siaw and Anokye M. Adam (2010) Exchange Rate Pass-Through in Ghana. International Business Research, 3(2), pp. 186 – 192.

Gagnon, J. E. and J. Ihrig (2001). "Monetary Policy and Exchange Rate Pass-Through." Federal Reserves System, International Finance Discussion Paper No.704.

Goldberg, P. K. and M. M. Knetter (1997). "Goods Prices and Exchange Rates: What Have We Learned?" Journal of Economic Literature 35(3): 1243.

Government of Ghana (1998) Ghana — Enhanced Structural Adjustment Facility Economic and Financial Policy Framework Paper, 1998–2000, http://www.imf.org/external/np/pfp/ghana/ghana0.htm, IMF.

IMF, (2008) International Financial Statistics, IMF

IMF (2006). "Exchange Rates and Trade Balance Adjustment in Emerging Market Economies." IMF Policy Papers(Octorber).

Kiptui, M., D. Ndolo and S. Kaminchia (2005). "Exchange Rate Pass-Through: To What Extent Do Exchange Rate Fluctuations Affect Import Prices and Inflation in Kenya?" Central Bank of Kenya Working Paper 1.

Krugman, P. (1986). "Pricing to Market When the Exchange Rate Changes." NBER Working Paper No. w1926.

Liu, L. and A. Tsang (2008) “Exchange Rate Pass-Through to Domestic Inflation in Hong Kong” Working Paper No.2, Hong Kong Monetary Authority, March.

Lutkepohl, H. (1991). Introduction to Multiple Time Series Analysis. Berlin, Springer-Verlag.

McCarthy, J. (1999). "Pass-through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialised Economies." BIS Working Paper no. 79.

Menon, J. (1995). "Exchange Rate Pass-Through." Journal of Economic Survey 9(2): 197-231.

Mwase, N. (2006). "An Empirical Investigation of the Exchange Rate Pass-through to Inflation in Tanzania." IMF Working Paper 150.

Obstfeld, M. and K. Rogoff (1995). "Exchange Rate Dynamics Redux." Journal of Political Economy 103(3): 624-660.

Paya, I. and D. A. Peel (2005) "The Process Followed by PPP Data. On the Properties of Linearity Tests", IVIE working paper, WP-AD 2005(23).

Sahminan, (2002) Exchange Rate Pass-Through into Import Prices: Empirical Evidences from Some Southeast Asian Countries. Mimeo

Sanusi, A. R. (2006), Exchange Rate Reforms in Sub-Saharan Africa: the Case of Ghana (1986-2005), Internal Seminar Series, Department of Economics, Lancaster University Management School. June.

Sowa, N. K. and J. K. Kwakye (1993). "Inflationary Trends and Control in Ghana." AERC Research Paper 22.

Stulz, J. (2006). Exchange Rate Pass-through in Switzerland: Evidence from Vector Auto-regressions. SSES Annual Meeting: Industrial Organization, Innovation and Regulation. Lugano, The Swiss Society of Economics and Statistics.

Takagi, S. and Y. Yoshida (2001). "Exchange Rate Movements and Tradable Goods Prices in East Asia: An Analysis Based on Japanese Customs Data,1988-1999." IMF Staff Papers 48(2266-289).

Taylor, J. B. (2000). "Low Inflation, Pass-through, and the Pricing Power of Firms " European Economic Review 44(7): 1389-1408.