CAJAST105-384-1 |Received: 03 July 2017 | Accepted: 11 July 2017 | June-August-2017 [(5)2: 225-238] CANADIAN JOURNAL OF APPLIED SCIENCE AND TECHNOLOGY © 2017 OPEN ARCHIVES INITIATIVE | Volume 5| Issue 2 | ISSN: 2356-6173 Exchange Rate Pass-Through (ERPT): The Inter-Connectivity between Exchange Rate and Consumer Price Index in Ghana Abdul-Aziz Ibn Musah 1 , Du Jianguo 1* , James Small Azibah ab , Patrick Boateng Sarpong 1 ab P.O. Box ST 383 Stadium Kumasi Ghana 1 School of Management, Jiangsu University, 301 Xuefu Road, Zhenjiang, Jiangsu, P.R. China * Corresponding author: Prof Du Jianguo (jgdu2005@163.com) ABSTRACT The effect of exchange rates movements and its associated volatility has remained a crucial issue in a small open economy such as Ghana. The subject plays a key role in international financial and macroeconomic management and policy formulation. This need induced a considerable measure for looking into on the pass- through effects of exchange rates. This study employs co-integration and error correction model to explore the pass-through effects of exchange rate changes to consumer price index for Ghana, being extended from January 2000 to March 2016. The investigation looks to give answers to various inquiries like the degree of exchange rate pass- through (ERPT) to consumer price, issues of asymmetry effects, the validity of purchasing power parity and exchange rates models. The empirical evidence indicates that, fluctuations in the exchange rate either affect inflation through direct changes in import prices or through aggregate demand, which is issued as part of changes in the relative price between foreign and domestic commodities. However, the low ERPT to consumer prices suggests that inflation is most likely affected by other factors than the exchange rate. The model included variables like, inflation, consumer price interest rate which responded significantly to shocks in external price. An increase (positive shock) in the foreign price variable results in domestic prices is being increased significantly an indication that Ghana is exposed to global price shocks (imported inflation). Using variance decomposition test in this study, demonstrates the importance of shocks within the imports and the consumer price themselves verse shocks from the exchange rate and other variables in the economy. The findings suggest that sound monetary policies and economic management environment should focus on achieving stable exchange rate inflation since monetary policies has no positive effect on commodities. Keywords: Rate Pass-Through, Consumer Price Level, Interest Rate, Co-Integration, Exchange INTRODUCTION An expansive research has shown that the extent of exchange rate pass-through effect has important implications for the timing of current account adjustments (Adu, Karimu, & Mensah, 2015; Krugman & Obstfeld, 2003), the conduct of fiscal policy (Aron, Farrell, Muellbauer, & Sinclair, 2014; Aron, Macdonald, & Muellbauer, 2014; Corsetti, Dedola, & Leduc, 2010; Dufrénot, 2011; Warsh, 2013), the choice of exchange rate regime, and the international transmission of shocks (Căpraru & Ihnatov, 2012; Klein & Shambaugh, 2012). The pass-through effect of exchange rate movements to domestic monetary value occupies a very dominant position in international finance and remains on the much-debated questions among both professionals and academia. Traditional open- economy macroeconomic models paid little care to pass-through, because in such exemplar markets are characterized by perfect competition, prices are assumed to be fully flexible, and purchasing power parity is assumed to be valid at all times, which suggested a complete and immediate ERPT. According to (Gust, Leduc, & Vigfusson, 2010; Helen, 2012; Kochen & Sámano, 2016; Saunders & Cornett, 2014), the pass-through effect operates broadly through prices of imported goods in the consumer price index and price setting and expectations. Although mainstream open-economy