Patterns and Causal Connections between Changes in Exchange Rates and Interest Rates in Ghana

Trends and causal relationships between Ghana's exchange rate and interest rate are investigated in this paper using Granger causality, cointegration,  and error correction models. Monthly data from 2007 to 2020 are employed. The results show that both variables show a strong positive trend. Also,  strong causation runs from the exchange rate to the interest rate, but the interest rate only weakly accounts for exchange rate changes. The findings  further reveal that the two variables are co-integrated, and thus, using the interest rate lags in describing the exchange rate and vice versa is beneficial.  Finally, it is suggested that policymakers closely track the exchange rate-interest rate nexus to craft policies that engender macroeconomic stability in the  long run.