This paper aims to examine the effects of exchange rate volatility on consumption by focusing on a small open sub-Saharan Africa (SSA) country, Ghana, which has experienced exchange rate volatility frequently.
The authors used annual data covering the period 1980-2015, the annualised variance of the real exchange rate as a measure of exchange rate volatility and a technique that is able to separate short-run effects from long-run effects.
The authors found that exchange rate volatility has negative effects on domestic consumption in the short run, which is passed on as negative long-run effects. This conclusion is unaffected by an alternative measure of exchange rate volatility and the choice of lag restrictions.
The authors’ finding suggests that policymakers should seek to reduce or prevent exchange rate volatility by pursuing various policies including limiting foreign currency transactions within the country and promoting quality exports.
The extant studies have examined the effects of exchange rate volatility on consumption by considering countries in regions other than SSA. This paper focuses on a small open SSA country which has experienced exchange rate volatility frequently. Unlike most studies, this paper differentiates short-run effects from long-run effects.
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