Analysis Of Short and Long Run Interactions Between Real Effective Exchange Rate and Private Investment in Ghana: A Structural Vector Autoregressive Approach

Abstract

This paper investigates the dynamic interactions between the real effective exchange rate (REER) and private investment in Ghana using a structural vector autoregressive (SVAR) model. Utilizing annual data from 1984 to 2019, the study explores both short and long run effects, revealing that a depreciation in the REER results in an increase in private investment in the long run. The analysis, which was performed across various specifications, including bivariate and quadrivariate SVAR models, suggest that a weaker domestic currency enhances the competitiveness of domestic goods, thereby stimulating private investment. The findings emphasize the importance of maintaining a competitive exchange rate, encouraging the substitution of imported goods for those produced domestically, and managing inflation to foster private investment.