THE EFFECT OF COMMODITY PRICES ON EXCHANGE RATE: EMPIRICAL EVIDENCE FROM GHANA

Back to Page Authors: Buah, Aku-Sika

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Keywords: Exchange rate, Commodities, Prices, Fluctuations

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Abstract: The main purpose of this study is to examine the effect of commodity prices on exchange rate using Ghana as a case study. Monthly data on exchange rate, cocoa, gold, interest rate and inflation from the periods 1999 to 2014 were employed. The study first adopted Custav Cassels’s absolute version of the PPP model to establish a relationship between commodity prices and the exchange rate. The Johansen cointegration technique and the Vector Error Correction Model (VECM) were used to test if cointegration exists among the variables of interest and measure the long run relationship among the variables of interest respectively. The study further proceeded to test for the presence of volatility among to commodity prices using the GARCH methodology. The results indicated that the commodity prices are volatile and therefore have stochastic shocks. The study finally used the Impulse Response Function to examine the stochastic shocks of the commodity prices on the exchange rate. The study however found out that all the variables are positively related with the exchange rate except for inflation.

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