EXCHANGE RATE FLUCTUATIONS AND DOMESTIC INVESTMENT: EVIDENCE FROM GHANA

Michael Opoku Baah

Abstract


Exchange rate fluctuation is one of the critical determinants of domestic investment in Ghana. Though exchange rate fluctuations can have an asymmetric effect on domestic investment, other studies assumed a symmetric relationship between these variables. Using annual data from the period of 1980-2017, the Linear Autoregressive Distributed Lag Model (ARDL) and Non-linear Autoregressive Distributed Lag model (NARDL) was used to investigate the symmetric and asymmetric effect of exchange rate fluctuation on domestic investment by creating two new variables to substitute exchange rate fluctuations (appreciation and depreciation variables). From the first objective, fluctuation in the rate exchange was found to harm domestic investment. The second objective confirmed the asymmetric effect of exchange rate fluctuations on domestic investment. Income had a positive effect on domestic investment which affirms the assertion of the accelerator theory of investment. The other explanatory variables included in the study, foreign direct investment and interest rate differential were found to be detrimental to domestic investment while domestic credit to the private sector had a positive effect on domestic investment. The study recommends that the Bank of Ghana should put in place long-lasting, effective, and efficient measures to stabilise the exchange rate.

JEL: F31, F41, E22, E44, E51, E52, E58

 

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Keywords


exchange rate, domestic investment, fluctuation

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References


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DOI: http://dx.doi.org/10.46827/ejefr.v8i1.1649

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