“The paper determines real exchange rate misalignment for Ghana for the period 1980 – 2010. It finds that the equilibrium real exchange rate is influenced to a significant extent by “fundamental” or “real” factors – represented in the study by productivity, trade openness, real relative interest rate, government expenditure, terms-of-trade and foreign reserves. Nominal macroeconomic variables – represented by domestic credit and the budget deficit – however, do not have a significant effect on the ERER. The actual real exchange rate is misaligned relative to the equilibrium value either way – i.e. overvaluation or undervaluation – throughout the study period. The results indicate strong real overvaluation during 1981-83, and moderate overvaluation or undervaluation for other sub-periods. The real exchange rate adjusts rapidly to the equilibrium level, with about 97% of any misalignment being corrected within a year. Tentative inference from exchange rate data available from the Bank of Ghana suggests that during January 2011 – June 2012, contrary to expectation of possible real undervaluation following the nominal depreciation of about 20%, the real exchange rate was only restored to its equilibrium level and by end-June 2012 there was no significant misalignment either way.”
