Abstract

This research examines the impact of import substitution policy on the trade balance and exchange rate in Ghana by employing the macroeconomic variables – inflation rate and interest rate. For a robustness check, the policy is analyzed using the augmented trade balance and magnitude of import substitution approaches. The study utilizes quarterly data from 1990Q1 to 2021Q1 and applies the Johansen cointegration test and vector error correction model to estimate the dynamics of the policy impact. The results show that the import substitution policy boosts the capacity of domestic production and improves the trade balance. Also, the study reveals that both the augmented trade balance and magnitude of import substitution and international reserves have a symmetric negative impact on the exchange rate at a statistically significant level of 1%, ceteris paribus. This implies that the implementation of the import substitution policy would ensure the appreciation or stabilization of the domestic currency value in Ghana without depleting the international reserves in the long-run.

Key words: Exchange rate; trade balance; international reserves; inflation rate; interest rate; augmented trade balance; magnitude of import substitution.