An Empirical Analysis of Balance of Payment in Ghana using the Monetary Approach

Abstract

A major challenge to the Ghanaian economy is the persistence disequilibrium in the balance of payments. This is a general economic phenomenon in most developing countries. Using an annual data set from 1980-2010. This study analyzes the balance of payments for Ghana using a monetary approach with the aid of econometric models. The study shows that the balance of payment disequilibrium in Ghana is not influence only by monetary variables. Out of the four monetary independent variables three were found to be significant. The results also show that domestic credit, GDP growth, and interest rate are found to be significant. Domestic credit and interest rate are negatively related to net foreign assets while GDP growth is positively related. Inflation however is insignificantly related to net foreign assets. However, government expenditure and public debt may influence the balance of payment in Ghana. The implication for policy is that to correct the disequilibrium in balance of payment, government should give equal attention to other policy levels instead of relying solely on monetary tools to attain stability in the country’s balance of payments account.

Key words: balance of payment, interest rate, inflation, domestic credit, Ghana