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dc.contributor.authorOpoku-Afari, Maxwellen_US
dc.contributor.authorMorissey, Oliveren_US
dc.contributor.authorLloyd, Timen_US
dc.description.abstractOne of the most challenging problems in developing countries such as Ghana is exchange rate management, that is, 'getting the exchange rate right' especially in the context of exchange rate misalignment. The major research and policy question is what constitutes the equilibrium real exchange rate (ERER) and how can it be measured? Acknowledging the importance of fundamentals in determining the equilibrium real exchange rate, the paper concentrates on the effects of capital inflows (by decomposing capital inflows into official inflows, 'permanent' inflows and 'non-permanent' inflows). Vector Autoregressive (VAR) techniques are used to model the long-run equilibrium real exchange rate in Ghana, and based on a multivariate orthogonal decomposition technique, the equilibrium steady state path is identified which is used in estimating misalignments. As predicted by the Dutch Disease theory, results indicate that capital inflows tend to appreciate the real exchange rate in the long-run. Capital inflows is the only variable generating real appreciation in the long-run; technology change, trade (exports) and terms of trade all tend to depreciate the real exchange rate. The only variable that has a significant (depreciating) effect on the real exchange rate in the short-run is trade, implying that changes in exports are the major driver of exchange rate misalignment. It is also shown that the real exchange rate is slow to adjust back to equilibrium, implying policy ineffectiveness or inflexibility.en_US
dc.publisherCentre for Research in Economic Development and International Trade, Univ. of Nottingham Nottinghamen_US
dc.relation.ispartofseriesCREDIT Research Paper 04/12en_US
dc.subject.keywordCapital Inflowsen_US
dc.subject.keywordReal Exchange Rateen_US
dc.titleReal exchange rate response to capital inflows: A dynamic analysis for Ghanaen_US
dc.typeWorking Paperen_US
Appears in Collections:CREDIT Research Papers, The University of Nottingham

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