Exchange Rate Depreciation and Balance of Trade in Developing Countries: Evidence from Ghana

Abstract

This study seeks to explore the relationship between international trade and currency devaluations using quarterly time series data from Ghana from 2000Q1 to 2017Q4. The study employed the autoregressive distributed lag (ARDL) approach to establish both the long run and short run relationship. The study found that, real domestic income and real exchange rate have a positive relationship with imports in Ghana implying that, depreciation will increase exports whiles appreciation increase imports. Therefore, currency devaluations in Ghana will improve the Trade balance of Ghana. The study therefore recommends that, government and policy makers should pay more attention to stabilising the real exchange rate given that, the Ghanaian economy is import driven and continuous devaluations will deteriorate the import sector thereby deteriorating the Economy as a whole since most sectors of the economy depends on import for production therefore causing economic growth.