n African Finance Journal - Parity theories and Ghana "cedi" / U.S "dollar" exchange rate instability




The "cedi"/ "dollar" rate is studied. Interest rate parity results suggest better returns on US investments (and cedi overvaluation) in 41.4% of the sample years, while in 58.6% of the cases (reflecting cedi undervaluation), investing in Ghana would have yielded higher returns. Large gaps between the actual and the purchasing power and interest rate parity values of the cedi/dollar rate, and high asymmetric volatilities of these rates, suggest non-parity and continuous cedi weakening. Co-integration tests suggest no long run purchasing power parity (PPP) - as the large non-zero gaps also show - which is consistent with most PPP literature. Exchange rate policy options (i.e. flexible and fixed exchange rates, monetary union, and dollarization) that may strengthen the cedi - and their implications - are discussed.


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