THE EFFECTS OF EXCHANGE RATE VOLATILITY ON DOMESTIC CONSUMPTION IN GHANA

Abstract

The volatility of the exchange rate is an important phenomenon that requires a lot of attention, especially in nations whose development are based on the development of the global market. Globalization has led many countries, including Ghana, to open up to international trade; As a result, the exchange rate has become a major player affecting not only a country's trade flows, but also other macroeconomic variables. However, previous studies of exchange rate volatility have not considered Ghana, even though it is a small, open economy that has often experienced exchange rate volatility. Using the annual data covering the period 1980-2016 and the annualized variance of the real exchange rate as a measure of exchange rate volatility, as well as the Autoregressive Distributed Lag (ARDL) approach, the preliminary result obtained shows that all variables are integrated at order. This means that all variables display the unit root at all levels but remain motionless at the first difference. Finally, we find that the volatility of exchange rates has positive effects on domestic consumption in the short term. However, the exchange rate volatility negatively affects long-term domestic consumption. Therefore, we conclude that the exchange rate pass-through inflation to affect domestic consumption in Ghana. The results of the analysis, which covers the period 1980-2016, reveal that the pass-through effect of the exchange rate to domestic consumption in Ghana is substantial. Our results further suggest s that the effect of the volatility of the exchange rate on consumption is not dependent on financial sector development level. As a foreign exchange policy, authorities should avoid quoting the prices of local goods and services in foreign currency.