Determinants of exchange rate in Nigeria

Abstract

The aim of this paper is to empirically analyze the determinants of exchange rate of Nigeria during the time period 1980-2020. The data is taken from various  sources WDI (World Development Indicators) and IFS (International Financial Statistics). The real exchange rate (RER) is taken as dependent variable while  Gross Domestic Growth Rate (GDPG), Inflation Rate (INFL), Interest Rate (INTR) and Trade Openness (TOP) are used as independent variables. The unit root  analysis show that all variables are mixture I(O) and I(1). The result of co-integration analysis shows that all the variables have a long run relationship. After this,   Autoregressive Distributed Lag Model (ARDL) regression was applied. In the short term, GDP growth rate has significant negative relation with real exchange rate.  Inflation rate has a significant positive relationship with real exchange rate. Also in the short run, interest rate has a significant positive relation with the exchange  rate. While trade openness has an insignificant but negative relationship with real exchange. Furthermore, the findings in the long run established that there is  significant negative relationship between real exchange rate and GDP growth rate. This is consistent with short run finding. Also, a significant positive relationship  was established between real exchange rate and inflation rate. As shown by the long-term findings, an insignificant positive relationship was established between  interest rate and real exchange rate in Nigeria. Also, a negatively insignificant relationship was established between real exchange rate and trade openness.  Appropriate policy recommendations were made.