Effects of Some Selected Macro-Economic Indicators on Exchange Rates (1986-2019)

Abstract

Background: The foreign exchange market plays a significant role in the development of a country and the stability of her currency in recent years. Objectives: This article reports the effect of macro-economic indicators on foreign exchange parallel markets for a period between 1986 – 2019. Methods: The macro-economic indicators used were inflation rate, demand for money, the supply of money, OPEC crude oil and the real GDP growth with the dependency of the foreign exchange market. The data for this project was extracted from the publication of the Statistics Unit of the Central Bank of Nigeria in recent years. Multiple Linear Regression was used with special attention on Multicollinearity, Serial Correlation and Heteroscedasticity. The coefficient of determination value of 0.740 shows that the demand for money, the supply of money, OPEC crude oil and the real GDP growth accounted for over 74 percent of the variation in the exchange rate in Nigeria between the years 1986 and 2019. Results: It was discovered from the findings that, money supply into the circulation determines the foreign exchange rate. And it was also discovered that the money supply has a high dependency ratio on the exchange rate among other macro-economic indicators. Thus, the reduced model is a result of the insignificancy of other variables while only variable two (supply of money) is significant. Conclusions: The use of a flexible exchange rate had eliminated the over-valuation of the naira. The parallel market premium has also been narrowed from 600 percent in 1986 to about 11.0 percent in 2018. These were attributed to the weak and import-dependent production structure of the economy. The suggested solution was articulated towards increasing foreign exchange inflows, reducing demand, as well as reforming the foreign exchange market to evolve a more realistic exchange rate for the naira. 

Keywords: Multiple Linear Regression, Macro-Economic Indicators, Exchange Rate, Multicollinearity, Serial Correlation and Heteroscedasticity