Crude oil price, exchange rate and gross domestic product nexus in an emerging market: A cointegration analysis

Abstract

AbstractCrude oil plays an important role in the economic development of many emerging markets. This study examines the role of global crude oil price on the exchange rate (EXR) and gross domestic product (GDP) of Ghana (a new oil producing country) using the Johansen modelling technique for the period, 1980–2013. Following the cointegration of the variables, the vector error correction model was developed, which revealed that oil price could increase the GDP growth by 3 per cent but can negatively affect the EXR in the long run. The short‐term analysis points to Granger causality from oil price and GDP to energy consumption. It further reveals causality from oil price and EXR to GDP, which indicates that development in the global oil price as well as the performance of the currency can impact economic growth. No significant evidence of the oil price role in EXR volatility was found; however, the ‘Dutch disease’ syndrome was eminent through EXR appreciation. Moreover, the overall response of GDP to oil price shocks for the forecast period is insignificantly positive even though oil price shock tends to retard economic growth in the first 3 years.