On the impact of exchange rate uncertainty on private investment in Ghana

• Date: 01 January 2021
• Published date: 01 January 2021
• Author: Johnson Worlanyo Ahiadorme,Emmanuel Kwasi Mensah,Lawrence Adu Asamoah
• DOI: http://doi.org/10.1002/ijfe.1785

RESEARCH ARTICLE

On the impact of exchange rate uncertainty on private investment

in Ghana

Emmanuel Kwasi Mensah

1

| Lawrence Adu Asamoah

1

| Johnson Worlanyo Ahiadorme

2

1

Dipartimento di Economia, Università degli

Studi dell'Insubria, Varese, Italy

2

Dipartimento di Economia, Università degli

studi di Verona, Verona, Italy

Correspondence

Emmanuel Kwasi Mensah, Dipartimento di

Economia, Università degli Studi

dell'Insubria, Via Monte Generoso 71,

Varese 21100, Italy.

Email: ekmensah@uninsubria.it;

kwasimensah87@gmail.com

Abstract

High levels of private investment are correlated with higher economic growth and

development across countries, but questions remain whether this relationship is sus-

tainable given the high levels of exchange rate uncertainty in developing economies

albeit other macroeconomic instabilities. This paper examines empirically the

impact of real exchange rate uncertainty on private investment in Ghana. We, thus,

apply the accelerator theory to investigate the contributing effect of real exchange

rate uncertainty on the movement of private investment from the economic stand-

point of an import-dependent economy such as Ghana. The study employs annual

time series data from 1980 to 2016. Moreover, we adopt the autoregressive distrib-

uted lag model of cointegration where we find evidence of a long-run positive rela-

tionship between positive private investment and real exchange rate uncertainty as

well as trade openness. The short-run evidence provides a confirmation of the

impact of inflation, trade, and real exchange rate uncertainty on private investment.

Specifically, our results show that there is a positive pass-through effect from real

exchange rate uncertainty to private investment decision in resource allocation.

Shocks from lending rate and terms of trade were found to exhibit negative effects

on private investment in the short and long run. As a matter of policy, it is impera-

tive for policymakers in developing economies to consider the effect of exchange

rate and terms of trade associated with bilateral trade and investment-related agree-

ments to minimize the effects of contemporaneous shocks from uncertainties.

KEYWORDS

ARDL, developing economies, exchange rate uncertainty, Ghana, private investment

1|INTRODUCTION

Despite being an integral force that propels economic

growth, the private sector in developing markets is primarily

susceptible to uncertainties that abound with trade and mac-

roeconomic policies (e.g., Bleaney, 1996; Easterly, Bank,

Kremer, Pritchett, & Summers, 1993; Serven, 2003). Private

investments continue to stifle from unstable macroeconomic

conditions, high cost of doing business, rising cost of capital,

and worsening terms of trade and unfavorable exchange

rates. The extant literature on private investment seems to

reveal that investors are more hesitant to invest particularly

in developing countries where exchange rate and interest rate

uncertainty abounds. In fact, the general consensus that

exists in tackling exchange rate-related macroeconomic

issues reveals that wrong levels of the real exchange rate

could lead to significant welfare costs, which consequently

could transmit incorrect signals to economic agents thereby

dampening economic growth (Chowdhury & Wheeler,

2015). Recent developments show that emerging economies

Received: 26 June 2018 Revised: 3 December 2018 Accepted: 13 September 2019

DOI: 10.1002/ijfe.1785

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