Modelling the Relationship Between Trade Openness, Macroeconomic Variables and Economic Growth in Ghana Using Ardl Models

This study looked at the interconnections among trade openness, national income (GDP), investment, exchange rate, government spending, financial development and inflation in Ghana employing the autoregressive distributed lag (ARDL) model. The bounds cointegration, as applicable within the ARDL modelling was carried out to check the existence or otherwise of long run relationships among the economic variables while the error correction model (ECM) was also used to capture the short-term relationships among the variables. Unlike known previous studies in Ghana, this study made use of three trade openness proxies including ratio of imports plus exports to GDP (OPEN1), ratio of export to GDP (OPEN2) and the ratio of import to GDP (OPEN3). With GDP growth as endogenous variable, the bound co-integration analysis results showed that there exists co-integration among GDP, openness to trade and the macroeconomic variables included in the study. In this study, the short-run results found that openness to trade and government spending had significant positive effects on Ghana’s GDP growth. However, investment, exchange rate and financial development were found to be impacting growth in GDP significantly but negatively. In the long term, trade openness and government spending again had positive influence on GDP growth whiles investment, real effective exchange rate and financial development still impacted GDP growth significantly and negatively at 5 percent significance level. This study recommends among others things that the government of Ghana should reduce trade barriers and streamline regulations in critical sectors to promote GDP growth in Ghana.