A Re-Examination of the Exchange Rate-Interest Rate Diffewrential Relationship in Inflation Targeting Regime

This study revisits the exchange rate and interest rate differential relationship since Ghana adopted an inflation targeting regime. Using macro-data spanning 2002 to 2019 for Ghana and the United States, we show the nonexistence of a relationship in both the short and long run. Further, we show a positive but slow responsiveness of the exchange rate to interest rate differential shocks from the short to the medium term. The long-run result, however, shows a strong and significant response of the exchange rate to interest rate differential shocks. We recommend that the Bank of Ghana address perennial macroeconomic instability, especially inflation which we conjecture fuels investment uncertainty and investment insensitivity to interest rates