Dollarization and macroeconomic instability in Ghana

A Doctoral Thesis Submitted in fulfilment of the requirements for the award of Doctor of Philosophy, The Graduate School of Business Administration, University of the Witwatersrand February 2016The liberalization of foreign exchange markets occasioned by the widespread acceptance of floating exchange rate systems brought about prevalent acceptance of foreign currency (usually U.S. dollars) in many developing and transition economies. Facing both domestic and foreign imbalances, a number of developing economies have embraced foreign currencies as a store of value (asset substitution), and in some instances as a medium of exchange for domestic transactions (currency substitution). This thesis examines dollarization/currency substitution, its impact on macroeconomic fundamentals, and the challenges it poses for effective formulation and transmission of monetary policy in Ghana. The entire thesis is organised into five empirical essays, each touching on a specific subject within the broad theme of dollarization and economic instability. The first essay explores the macroeconomic determinants of financial dollarization. The evidence establishes that exchange rate depreciation and financial development drive dollarization. Additionally depreciation of the domestic currency increases demand for foreign currencies, while a more developed financial sector tends to curtail dollarization. The second essay models a long-run money demand function for Ghana within the portfolio balance framework. The results indicate that, although foreign interest rates and expected exchange rates (either separately or jointly) are relevant elements in the money demand function, there evidence is more in support of capital mobility and not currency substitution. The third essay provides evidence on how financial dollarization affects the volatility of nominal and real Ghana cedi/U.S. dollar exchange rates. The study showed that the effect of financial dollarization on nominal exchange rate volatility in Ghana is positive, thus, as demand for U.S. dollars becomes more extensive, the cedi/dollar exchange rate becomes more volatile and unstable. The fourth essay investigates the role of dollarization in the dynamics of inflation and inflation uncertainty. Contrary to common logic, the results indicate that dollarization has not played a significant role in the dynamics of inflation volatility. The study posits that, although there is no significant impact of dollarization on inflation volatility, inflation targeting affects the inflation-inflation uncertainty relationship in Ghana. The last essay considers the effectiveness of monetary policy transmission in Ghana and examines whether the degree of dollarization hinders or facilitates that process by accounting for the role of the inflation targeting. The results show that credit and exchange rate channels dominate the transmission mechanism, with the former assuming a more significant role in the inflation targeting period. Moreover, the contribution of dollarization has diminished in the post-inflation targeting era, suggesting that monetary authorities have paid more attention to the effects of dollarization in the current monetary regime. A number of policy prescriptions arising from the thesis are presented to guide domestic authorities in smoothing the path of the instability in the economy.MB201

Do macroeconomic variables play any role in the stock market movement in Ghana?

This study examines the impact of macroeconomic variables on stock prices. We use the Databank stock index to represent the stock market and (a) inward foreign direct investments, (b) the treasury bill rate (as a measure of interest rates), (c) the consumer price index (as a measure of inflation), (d)Average crude oil prices , and (e) the exchange rate as macroeconomic variables. We analyse quarterly data for the above variables from 1991.1 to 2007.4. employing cointegration test, vector error correction models (VECM). These tests examine both long-run and short-run dynamic relationships between the stock market index and the economic variables. The paper established that there is cointegration between macroeconomic variable and Stock prices in Ghana indicating long run relationship. The VECM analyses shows that the lagged values of interest rate and inflation has a significant influence on the stock market. The inward foreign direct investments, the oil prices , and the exchange rate demonstrate weak influence on price changes. In terms of policy implication, the establishment of lead lag relation indicate that the DSI is not informational efficient with respect to interest rate, inflation inward FDI, Exchange rate and world Oil prices.Stock Market, Cointegration, Toatl derivative, Stock duration, partial differentiation

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We estimate a Vector Error Correction Model to explore the long run and short run linkages between the world crude oil price and economic activity in Ghana for the period 1970:1 to 2006:4. The results point out that there is a long run relationship between the variables under consideration. We find that an unexpected oil price increase is followed by an increase in price level and a decline in output in Ghana. We argue that monetary policy has in the past been with the intention of lessening negative growth consequences of oil price shocks, at the cost of higher inflation.Oil price shock, cointegration, vector error correction, impulse response

Modelling Fiscal Sustainability in the Middle East and North African Region: A Pooled Mean Group Approach

This paper assesses the sustainability of fiscal policies in a panel of eight Middle East and North African countries over the period 1990 – 2010. Employing recent panel unit root and co-integration techniques, we find that fiscal policies are consistent with inter-temporal budget balance in accordance with the present value approach. The Pooled Mean Group estimator shows that there was no significant causality between government revenues and expenditures in the short-run. However, there is a long-run fiscal synchronization which demonstrates that fiscal sustainability strategies should aim at increasing revenues and cutting spending concurrently to avoid fiscal deficits and its attending problems such as high taxation, reduced savings and investments

Foreign Direct Investment and Stock market Development: Ghana’s Evidence

Using multivariate cointegration and error correction model, this paper examines the impact of Foreign Direct Investment (FDI) on the stock market development in Ghana. Our results indicate that there exists a long-run relationship between FDI, nominal exchange rate and stock market development in Ghana. We find that a shock to FDI significantly influence the development of stock market in Ghana

Macroeconomic Factors and Stock Market Movement: Evidence from Ghana

This study examines the role of macroeconomic variables on stock prices movement in Ghana. We use the Databank stock index to represent Ghana stock market and (a) inward foreign direct investments, (b) the treasury bill rate (as a measure of interest rates), (c) the consumer price index (as a measure of inflation), and (d) the exchange rate as macroeconomic variables. We analyze both long-run and short-run dynamic relationships between the stock market index and the economic variable with quarterly data for the above variables from 1991.1 to 2006.4 using Johansen's multivariate cointegration test and innovation accounting techniques. We established that there is cointegration between macroeconomic variables identified and Stock prices in Ghana indicating long run relationship. Results of Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) indicate that interest rate and Foreign Direct Investment (FDI) are the key determinants of the share price movements in Ghana

Foreign Direct Investment (FDI) and Stock market Development: Ghana Evidence

Using multivariate cointegration and Innovation Accounting Methods, this paper examines the impact of Foreign Direct Investment (FDI) on stock market development in Ghana. The paper finds long-run relationship between FDI and stock market development in Ghana. Using impulse responses and Variance Decomposition from Vector Error Correction Model we find that shocks in FDI significantly influence the development of stock market in Ghan

Foreign Direct Investment and Stock market Development: Ghana’s Evidence

Using multivariate cointegration and error correction model, this paper examines the impact of Foreign Direct Investment (FDI) on the stock market development in Ghana. Our results indicate that there exists a long-run relationship between FDI, nominal exchange rate and stock market development in Ghana. We find that a shock to FDI significantly influence the development of stock market in Ghana

Foreign Direct Investment (FDI) and Stock market Development: Ghana Evidence

Using multivariate cointegration and Innovation Accounting Methods, this paper examines the impact of Foreign Direct Investment (FDI) on stock market development in Ghana. The paper finds long-run relationship between FDI and stock market development in Ghana. Using impulse responses and Variance Decomposition from Vector Error Correction Model we find that shocks in FDI significantly influence the development of stock market in Ghan

Implications of Oil Price Shocks for Monetary Policy in Ghana: A Vector Error Correction Model

We estimate a Vector Error Correction Model to explore the long run and short run linkages between the world crude oil price and economic activity in Ghana for the period 1970:1 to 2006:4. The results point out that there is a long run relationship between the variables under consideration. We find that an unexpected oil price increase is followed by an increase in price level and a decline in output in Ghana. We argue that monetary policy has in the past been with the intention of lessening negative growth consequences of oil price shocks, at the cost of higher inflation