Implications of Exchange Rate Dynamics and External Reserve for Investment and Inflation in Nigeria

Abstract

In this paper, we examined the impact of exchange rate dynamics and external reserve on inflation and investment in Nigeria between the period 1970 – 2009, using a combination of ordinary least squares, augmented dickey fuller unit root test and the co- integration test. The changes in external reserve had a positive influence on the growth of foreign direct investment and exchange rate appreciation but external reserve accumulation has not induced the inflation rate in Nigeria. Therefore, we suggest that management of Nigerian external reserve should look at other factors that can accelerate a reduction in the level of inflation via external reserve management.