Abstract
Exchange rates are a key determinant of the domestic prices for agricultural goods and therefore affect the quantity of these goods produced for domestic consumption and export. Accordingly, in competitive domestic markets with complete market integration with foreign markets, exchange rate changes are fully reflected in the domestic currency prices of traded goods. However, agricultural policy instruments such as intervention mechanisms tend to insulate domestic markets and impede exchange rate transmission. The study examines the influence of nominal exchange rate changes in Ghana on the annual domestic producer prices of cocoa, a traditional export crop, and maize, a non-traditional export crop from 1966 to 2008. Nominal exchange rate changes in Ghana were found to reflect the gradual shift from a fixed to a flexible exchange rate regime since independence. Using an Autoregressive Distributed Lag model, it was discovered that exchange rate transmission was extremely low for both crops. Therefore, it did not have a statistically significant effect on domestic producer prices of cocoa and maize in Ghana. Whiles market intervention was found to be the cause of this phenomenon in the case of cocoa, the very nature of maize as a non-traditional export with low export supply accounted for the lack of exchange rate transmission in the maize sub-sector. Consistently, world price transmission to domestic producer prices of both crops was also not statistically significant.
Highlights
Since attaining independence in 1957, agriculture has been the mainstay of the Ghanaian economy and continues to be a fundamental instrument in sustainable development
The results reported an R-squared of 30% from regressing domestic cocoa price differenced in the first order on the exchange rate, world cocoa price and GDP all differenced in the first order using the Autoregressive Distributed Lag (ADL) model
It is found that the exchange rate was not statistically significant
Summary
Since attaining independence in 1957, agriculture has been the mainstay of the Ghanaian economy and continues to be a fundamental instrument in sustainable development. As of 2009, about 80% of Ghana’s total agricultural output is produced on smallholder, family operated farms using rudimentary technology with an estimated 2.74 million households operating farms or rearing livestock. Export earnings from agriculture constitute a major source of foreign exchange, contributing 37% of Ghana’s total foreign exchange earnings in 2009 [23]. Traditional export crops are crops characterized by high value and quality that are primarily grown for export [7]. Cocoa is Ghana’s principal traditional export crop and remains the country’s single largest export earner [13]. Given the importance of cocoa as a major source of income and foreign exchange, the government has sought to retain a controlling interest in the sub-sector.
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