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External aid Inflows and the Real Exchange Rate in Ghana

External aid Inflows and the Real Exchange Rate in Ghana

Paper No. RP_110 | By Harry A.Sackey | Category: Research Papers | November 2001 | English
This paper develops an empirical model for Ghana's real exchange rate with special focus on foreign aid. The novelty of this study is the interfacing of exports with a policy environment, using aid as proxy, to see how it affects export performance.
The paper finds that although aid dependence is quite high, aid inflows lead to depreciations in the real exchange rate. Aid inflows have also had a positive impact on export performance.
The paper concludes that for external aid to be an effective investment, policy management needs to focus on ensuring the prevalence of sound macroeconomic fundamentals, among others.
This paper, in broad terms, seeks to develop an empirical model for the real exchange rate in Ghana with special focus on the role of foreign aid. The paper then attempts to link this with an export performance model in order to identify policy implications and management issues.
Generally, it is hypothesized, first, that external aid inflows to Ghana result in real exchange rate appreciations, and second, that exports respond positively to a good policy environment.

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