Real exchange rate misalignment and macroeconomic implications: Recent evidence from Ghana

Abstract

We evaluate the degree of real exchange rate (REER)  misalignment and its macroeconomic implications for the  Ghanaian economy using quarterly data (2000Q1-2015Q3). Our results uncovered a clear misalignment of the actual REER from its equilibrium level throughout the sample period, although the REER was close to its equilibrium level at the end of 2012. The study also revealed a weak positive undervaluation-economic growth nexus for Ghana. Overvaluation was observed to exert disinflationary pressures, while undervaluation tends to increase inflationary pressures in Ghana. The study thus suggests that the use of REER undervaluation as a deliberate industrial policy instrument for sustained economic growth may be  counterproductive in the context of Ghana, as such policy may potentially undermine price stability objective of the central bank.

Keywords: Equilibrium Exchange Rate; Misalignment;Ghana.