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

Abstract

High levels of private investment are correlated with higher economic growth and development across countries, but questions remain whether this relationship is sustainable 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 standpoint of an import‐dependent economy such as Ghana. The study employs annual time series data from 1980 to 2016. Moreover, we adopt the autoregressive distributed lag model of cointegration where we find evidence of a long‐run positive relationship 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 imperative for policymakers in developing economies to consider the effect of exchange rate and terms of trade associated with bilateral trade and investment‐related agreements to minimize the effects of contemporaneous shocks from uncertainties.