Asymmetrical Effect Of Exchange Rate Changes On Money Demand: Empirical  Evidence From Ghana

Opoku Adabor; Emmanuel Buabeng

doi:10.4314/just.v41i2.1351

Mr. Opoku Adabor Kwame Nkrumah University of Science
Dr. Emmanuel Buabeng Kwame Nkrumah University of Science and Technology

DOI: https://doi.org/10.4314/just.v41i2.1351

Keywords: Exchange rate, money demand, asymmetric, income, nonlinear ARDL and Ghana

Abstract

In this paper, we account for currency substitution by including exchange rate in the money
demand function. Numerous recent studies have shown that exchange rate could have an
asymmetric effect on demand for money in different countries. In this study, we consider the
experience of Ghana and found that exchange rate changes have an asymmetric impact on
the demand for money. Specifically, our non-linear Autoregressive Distributed Lag Model
(NARDL) estimates revealed that the appreciation of Ghana Cedi against the US dollars reduces
the demand for money whereas depreciation of Ghana Cedi against the US dollars increases
the demand for money in Ghana, likely due to currency substitution or wealth effect. Other
supplementary findings from the study show that increase in real national income generates
an increase in demand for money in Ghana likely due to an increase in purchasing power of
Ghanaians. The results of this study suggest that effort should be geared towards stabilizing
exchange rate over a long period in order to stabilize money demand in Ghana. Additionally,
real income and interbank interest rate should also be considered as essential tools when
formulating monetary policies that aimed at stabilizing money demand in Ghana’s economy
to boost economic development.

Author Biographies

Mr. Opoku Adabor, Kwame Nkrumah University of Science

Opoku Adabor holds Bachelor of art and Master’s in economics both from Kwame Nkrumah
University of Science. He worked as graduate research assistant at KNUST after his first degree
and during his mater’s studies. He is currently a PhD student at RMIT University, Australia. His
research interest includes macroeconomics, monetary, health, energy economics and economic
policy analysis.

Dr. Emmanuel Buabeng, Kwame Nkrumah University of Science and Technology

The late Dr. Emmanuel Buabeng was a Senior Lecturer at the Department of Economics, Kwame
Nkrumah University of Science and Technology (KNUST), Kumasi-Ghana. He received B.A
degree, Master’s and PHD degree in economics from Kwame Nkrumah University of Science
and Technology (KNUST). He had professional experience in finance and teaching field for over
10 years. His research interest includes microeconomics, macroeconomics economic analysis
and financial economics.