The Effects of Exchange Rates on Trade Balance in Ghana

Akorli, Edem (2017): The Effects of Exchange Rates on Trade Balance in Ghana.

Abstract

This study examines the impact of exchange rates on the trade balance of Ghana. The paper uses macroeconomic indicators such as CPI and GDP in addition to Real Effective Exchange Rate to achieve the objectives of this study. Annual Time Series Data gathered from 1980 – 2016 was used in the analyses. Simple OLS regression was conducted to estimate the long run relationship of the variables on trade balance. The Johansen Cointegration Test and Error Correction Model were used to establish short run relationships. Findings from the study indicate that exchange rate has a negative impact on trade balance in the long run whiles GDP was revealed to impact negatively on the trade balance thus suggesting that an increase in the GDP leads to a deteriorating trade balance. The J-Curve phenomenon was however found to be non-existent in Ghana.

• Item Type: MPRA Paper
• Language: English
• Keywords: GDP, Trade Balance, Exchange Rate, Annual Time Series,Johansen Conintegration, Error Correction Mode, Marshall Lerner Condition, J-Curve
• Subjects: F - International Economics > F1 - Trade; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O10 - General

References

Alan G. Isaac. Lecture Notes: Real Exchange Rates & The Trade Balance. Department of Economics. American University, Washington, D.C.

Amoah, B., & Loloh, F. W. (2009). Trade Balance and Policy Efficiency: Evidence from Ghana. SSRN Electronic Journal. doi:10.2139/ssrn.2412419

Anning L. et al (2015). Exchange Rate and Trade Balance in Ghana- Testing the Validity of the Marshall Lerner Condition.

Asteriou, D. (2007), Applied Econometrics: A Modern Approach, Revised Edition. Palgrave Macmillan.

Bahmani-Oskooee, M. (1985). Devaluation and the J-Curve: Some Evidence from LDCs. The Review of Economics and Statistics, 67(3), 500. doi:10.2307/1925980

Bahmani-Oskooee, M., & Ratha, A. (2011). S-curve dynamics of trade between Sweden and her trading partners. Economic Systems, 35(3), 355-362. doi:10.1016/j.ecosys.2010.09.001

Christensen, C. (2012). The effect of GDP & exchange rate on the trade balance between the United States and Mexico. Proceedings of the National Conferences On Undergraduate Research . Retrieved from http://www.ncurproceedings.org/ojs/index.php/NCUR2012/article/view/157

Égert, B., & Lommatzsch, K. (n.d.). Equilibrium Exchange Rates in the Transition: The Tradable Price-Based Real Appreciation and Estimation Uncertainty. Structural Change and Exchange Rate Dynamics, 205-239. doi:10.1007/3-540-28526-1_16

Garber, P., & Svensson, L. E. (1994). The Operation and Collapse of Fixed Exchange Rate Regimes. doi:10.3386/w4971

Kilugala, M. (2013). The monetary approach to exchange rate determination: An Inconsistent Paradigm”, International Journal of Finance and Accounting, 2(7), 341-347. doi: 10.5923/j.ijfa.20130207.02.

Koch, Paul and Jeffrey Rosenweig (1990). The Dynamic Relationship Between the Dollar and the Components of the U.S. Trade. Journal of Business and Economic Statistics, 8(3). 355-364

Krueger, A. O. (1990). Perspectives on trade and development. Chicago: University of Chicago Press.

Krugman, P. (1979). A Model of Balance-of-Payments Crises. Journal of Money, Credit and Banking, 11(3), 311. doi:10.2307/1991793

Sowa, N. K., & Acquaye, I. K. (1999). Financial and foreign exchange markets liberalization in Ghana. Journal of International Development, 11(3), 385-409. doi:10.1002/(sici)1099-1328(199905/06)11:3<385::aid-jid590>3.0.co;2-p

Stucka, T. (2004). The Effects of Exchange Rate Change on the Trade Balance in Croatia. IMF Working Papers,04(65), 1. doi:10.5089/9781451848717.001

Wooldridge, J. M. (2013). Introductory Econometrics: A Modern Approach (5th Edition). Michigan State University, South- Western Cengage Learning.