The effects of exchange rate volatility on foreign trade in Ghana

Abstract. This paper examined the effect of real exchange rate volatility on the growth of export and import in Ghana. A monthly data was used. All the variables were cointegrated and vector error-correction model was used. It was found that, in the long-run, depreciation of real exchange rate, increase in volatility and increase in output growth were significant factors that increased the growth of export. Also, decrease in real exchange rate volatility and increase in industrial output growth were significant factors that can reduced the growth of import. However, in the short run, depreciation of real exchange rate and reduction in real exchange rate volatility were significant factors that can increase the growth of export. Also, depreciation of real exchange rate and reduction in real exchange rate volatility were significant factors that can decrease the growth of import. Finally, considering the directional causality, the current values of growth of export is determined by the past values of real exchange rate volatility Therefore, it was recommended that government policies that stabilized real exchange rate and reduce its volatility are to be encouraged to facilitate the growth of export and discourage the growth of import in Ghana.Keywords. Real exchange rate volatility, Import, Export, VECM, Cointegration.JEL. E40, E50, E60