The effect of oil price on exchange rate in Ghana

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Date
May, 2016
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Abstract
The aim of the research was to find out the relationship between exchange rate and oil prices. The study test for the presence unit root was found using the ADF test and the PP test procedure at levels but the variables became stationary after the first difference. Oil price showed a lot of volatility but the trend of the movement of exchange rate did not fluctuate as much since it was contant during some periods. However, both trends kept on increasing moderately with oil price change being lower than exchange rate. The study employed the Vector Error Correction Model (VECM). The secondary data employed consist of monthly time series data sampled over the period of January 2000- May 2015. The cointegration results showed that the variables are cointegrated hence have a long run equilibruim relationship. The short run estimation, the results shows that, past period value of real exchange rate imposes a positive and significant impact on the current level of exchange rate. The short run coefficient of oil price is positive but insignificant. Inflation has a negative and significant effect on exchange rate. The long run results show that, oil price has a positive and significant effect on exchange rate in Ghana. Inflation on the other hand has a negative and significant long run effect on exchange rate. The study recommends the storage of oil when the price is relatively low and hedging to reduce the risk associated with increase in oil price.
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A thesis presented to the Department of Economics, College of Humanities and Social Sciences in partial fulfillment of the requirement for the degree of Master of Science in Economics
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