Determinants of exchange rate threshold effect on economic growth. Evidence from Ghana

Abstract

PurposeThe exchange rate is an important driver of a country’s economic growth, influencing trade, investment, inflation, and employment. This study’s main objective was to investigate the threshold effects of exchange rates on economic growth.Design/methodology/approachIn this research, innovative endogenous threshold autoregressive (TAR) models introduced by Hansen (2000) are employed for estimation and inference. The dataset comprises secondary annual time series data from Ghana, covering thirty-one years from 1990 to 2021. Economic growth is represented by GDPPC, with the growth exchange rate serving as the crucial threshold variable.FindingsThe finding suggests a single exchange rate threshold for Ghana, indicating a nonlinear relationship with economic growth. However, above 8.97%, the exchange rate considerably slows growth, harming the economy. The exchange rate negatively influences growth in both low and high-exchange-rate regimes, but it is insignificant in the high regime. In addition, inflation has a significant negative influence on growth in the low regime but a positive impact on the high regime. In contrast, interest rates positively impact growth in both regimes, though not as significantly in the high regime.Practical implicationsThe findings from this study offer valuable insights to the Ghanaian government and policymakers as they consider choosing an exchange rate target that helps minimise the negative impact of a high exchange rate to promote economic growth.Originality/valueThis paper is remarkable for being one of the few studies that have explored the relationship between exchange rates and economic growth, exploring the threshold effect.