n Ghanaian Journal of Economics - Volatility and asymmetry of the USD/GHS exchange rate : monetary policy implications in Ghana




The paper examined the uncertainty and asymmetric effect of the dollar/cedi exchange rate using GARCH family models and the monetary policy implications of such uncertainties. The empirical results revealed that asymmetric and leverage effects were existent and persistent in the USD/GHS exchange rate such that negative news tends to exert a larger destabilizing effect on the volatility of exchange rate than positive news of the same magnitude. There is also a greater tendency for the volatility in domestic exchange rate to rise, largely driven by the continuous exchange rate depreciation. This study established that exchange rate volatility was remarkably restrained during the adoption of Heavily Indebted Poor Countries' Initiatives (HIPC) but has subsequently increased, following the adoption of inflation targeting (IT) in Ghana. The empirical results confirmed the effectiveness of interest rate (especially the interbank rate) in dampening the pass through of exchange rate volatility to inflation, albeit sluggishly, with a three-month policy transmission lag. The study therefore supports policy measures that rein in the rapid depreciation of domestic currency to help mitigate the upward bias in the volatility of USD/GHS exchange rate.


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