An Econometric Analysis of the Relationship between Gdp Growth Rate and Exchange Rate in Ghana

Abstract

This study attempts to examine the relationship between GDP growth rate and exchange rate in Ghana from the period 1980 to 2012. The paper employs the graphing of the scatter diagram for the two variables which are GDP growth rate and exchange rate, establishes the correlation between GDP growth rate and exchange rate using the Pearson’s Product Moment Correlation Coefficient (PPMC) and finally estimates the simple linear regression using OLS. Further tests were performed to test for the presence of autocorrelation, heteroscedasticity and multicollinearity. Autocorrelation and heteroscedasticity were found to be absent.  From our analyses, we strongly conclude that there is a positive relationship between GDP growth rate and exchange rate in Ghana which confirms to the theory that undervaluation (high exchange rate) stimulates economic growth in the short run. Therefore, policy makers should stabilise monetary and fiscal policies in the long run.

Keywords: GDP growth rate, Exchange rate, Ordinary Least Squares