paper assesses the effect of foreign aid inflows on real exchange rate in Ghana
in order to test the hypothesis that large foreign aid inflows might lead to
the appreciation of the real exchange rate of the recipient country and thus,
impact negatively on its trade position, a case known as “The Dutch Disease” effect.
Using the ordinary least squares method of estimation, the paper finds that
although foreign aid inflows to Ghana are quite high, foreign aid inflows have
positive impact on the real exchange rate. In other words, foreign aid inflows
lead to the depreciation of the cedi, implying that “The Dutch Disease”
hypothesis of large foreign aid inflows is rejected in the case of Ghana. In
terms of policy recommendation, the results suggest that Ghana can still
receive aid without fear of harming its exports competitiveness.