Eunice Osei-Asibey, Ezekiel N. N. Nortey and Ebenezer Okyere
Most central banks’ policy initiatives throughout the world have been aimed at achieving and maintaining price stability and in Ghana; the Bank of Ghana is no exception. The exchange rate of the GH cedi to the U.S. Dollar, Japanese Yen, C.F.A., Pound Sterling and the Euro (major trading currencies) are not normalized (i.e. it fluctuates with upward tendencies) in the country. In recent years, a number of related formal models for time-varying methodologies have been developed. The study uses Box-Jenkins Autoregressive Integrated Moving Average (ARIMA) approach to mathematically fit models that describe the monthly trading currencies between the Ghana Cedi against the major trading currencies. We then forecast one year ahead and compare the predictive powers of the models. This study attempts to outline the practical steps which need to be undertaken, in order to use the ARIMA model for forecasting changes/variabilities in the major trading currencies in Ghana which then helps in predicting inflation to near perfection. All the five major trading currencies used were ARIMA (1, 1, 0). They all fitted well with the exception of the C.F.A. This may be attributable to the re-denomination of the Cedi in July, 2007. Also none of the models were seasonal and the predominant components were trend and random variation.