Estimating the effect of currency substitution on exchange rate volatility: Evidence from Ghana

Figures & data

Table 1. Summary of descriptive statistics

	Returns On Exchange Rate (LNEXRD)	Currency Substitution (CS)	Interest Rate Differentials (LNIRD)	Domestic Interest Rate (LNDIR)	Foreign Interest Rate (LNFIR)
Mean	0.0146	0.2097	2.9878	25.2478	2.7210
Median	0.0067	0.2254	3.1285	24.0400	2.5400
Maximum	0.1579	0.3288	3.7730	47.9300	7.9000
Minimum	−0.2253	0.0115	1.5390	9.1300	0.0100
Std. Dev.	0.0278	0.0599	0.5423	11.1250	2.2350
Skewness	−0.2272	−1.5574	−0.7931	0.4820	0.2606
Kurtosis	22.8326	4.9452	3.1659	2.2849	1.7955
Jarque-Bera	5771.9060	198.3561	37.4084	21.1882	25.3323
Probability	0.0000	0.0000	0.0000	0.0000	0.0000
Sum	5.1354	74.0362	1054.7090	8912.4890	960.5300
Sum Sq. Dev.	0.2712	1.2637	103.5122	43565.2300	1758.3130
Observations	353	353	353	353	353

Source: Authors’ estimation using Eviews (version 10).

Figure 1. Trends of exchange rate differentials, returns on interest rates, currency substitution, domestic and foreign interest rates and exchange rates.

Source: Authors’ construction using Eviews (version 10).

Table 2. Unit root test results

Method					Statistic		Prob.**
Levels
Im, Pesaran and Shin W-stat					−0.59082		0.2773
** Probabilities are computed assuming asymptotic normality
Intermediate ADF test results
Series	t-stat	Prob.	E(t)	E(Var)	Lag	Max Lag	Obs
LNIRD	−2.8270	0.1885	−2.158	0.613	2	16	350
CSI	−2.8393	0.1842	−2.088	0.670	16	16	336
LNEXR	−1.5512	0.8100	−2.158	0.613	2	16	350
First difference
Im, Pesaran and Shin W-stat					−11.0254		0.0000
** Probabilities are computed assuming asymptotic normality
Intermediate ADF test results
Series	t-Stat	Prob.	E(t)	E(Var)	Lag	Max Lag	Obs
D(LNIRD)	−8.4064	0.0000	−2.179	0.605	1	16	350
D(CSI)	−4.4075	0.0024	−2.088	0.670	16	16	335
D(LNEXR)	−8.7495	0.0000	−2.179	0.605	1	16	350

Source: Authors’ estimation using Eviews (version 10).

Table 3. Johansen cointegration test

Unrestricted Cointegration Rank Test (Trace)
Hypothesized		Trace	0.05
No. of CE(s)	Eigenvalue	Statistic	Critical Value	Prob.**
None *	0.1009	55.9644	29.7971	0.0000
At most 1 *	0.0398	18.9627	15.4947	0.0144
At most 2 *	0.0138	4.8333	3.8415	0.0279
Trace test indicates 3 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon et al. (1999) p-values
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized		Max-Eigen	0.05
No. of CE(s)	Eigenvalue	Statistic	Critical Value	Prob.**
None *	0.1009	37.0018	21.1316	0.0002
At most 1	0.0398	14.1294	14.2646	0.0525
At most 2 *	0.0138	4.8333	3.8415	0.0279

Source: Authors’ estimation using Eviews (version 10).

Table 4. Uncovered interest rate parity hypothesis results

Variable	Coefficient	Std. Error	z-statistic	Prob. value
LN(GARCH)	0.0006	0.0002	2.5151	0.0119
LNIRD	0.0042	0.0008	5.1175	0.0000
MA(1)	0.3597	0.0590	6.0933	0.0000

Source: Authors’ estimation using Eviews (version 10).

Table 5. EGARCH-M regression results

Dependent Variable: Returns on nominal exchange rate (DLNEXR)
Mean equation
Variable	Coefficient	Std. Error	z-Statistic	Prob.
LN(GARCH)	0.0005	0.0002	2.5151	0.0119
LNIRD	0.0042	0.0008	5.1175	0.0000
MA(1)	0.3597	0.0590	6.0933	0.0000
Variance equation
Constant =$\omega$	−3.1816	0.2843	−11.1902	0.0000
GARCH term = $\phi$	0.6042	0.0352	17.1485	0.0000
ARCH term = $\psi$	0.7402	0.0260	28.5058	0.0000
Asymmetry effect = $\gamma$	0.3164	0.0329	9.6023	0.0000
Currency Subst. = $\delta$	32.2707	3.9572	8.1550	0.0000
Inflation Targeting = $\chi$	1.0004	0.1099	9.1009	0.0000

Source: Authors’ estimation using Eviews (version 10).

MacKinnon, J. G., Haug, A. A., & Michelis, L. (1999). Numerical distribution functions of likelihood ratio tests for cointegration. Journal of Applied Econometrics, 14(5), 563–577. https://doi.org/10.1002/(SICI)1099-1255(199909/10)14:5<563:AID-JAE530>3.0.CO;2-R

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Data availability statement

The data that support the findings in this current paper are available upon request from the corresponding author.