The impact of increasing productivity on Ghana’s exchange rate: A time series approach to test the Productivity Bias Hypothesis in Ghana

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The Productivity Bias Hypothesis (PBH) is a theory that has been used to try to explain the long-run behavior of Purchasing Power Parity. The extensive literature on the validity of the Productivity Bias Hypothesis has yielded mixed results. These results are dependent on the econometric model used (Officer, 1976) and the type of dataset employed (Bahmani-Oskooee & Nasir, 2005). This study tested the validity of the PBH using data from Ghana. To do so, the study answered the following questions; Will increasing productivity in Ghana prove to be an effective strategy to stabilize the cedi exchange rate? Does the productivity Bias Hypothesis hold in Ghana? Is the exchange rate in Ghana affected by price levels? Is the exchange rate in Ghana affected by productivity levels? To answer the questions, a model by Zakaria and Ahmad (2009) was employed to test data between Ghana and its major trading partners by running a regression analysis. The variables used in the model were; nominal exchange rate, price levels, and productivity indices. Regression results validated the PBH between Ghana and its major trading partners. From the analysis, the coefficients of price, domestic sector, and foreign sector were, in most cases, negative, negative and positive. This implies that Ghana has the potential to enjoy real appreciation in its bilateral exchange rates with its major trading partners if it goes through a period of sustainable growth.
Undergraduate thesis submitted to the Department of Business Administration, Ashesi University, in partial fulfillment of Bachelor of Science degree in Business Administration, May 2020
Productivity Bias Hypothesis (PBH), Ghana, international trade, Purchasing Power Parity, World Bank Development Indicators, exchange rate