Econometric modeling of the impact of exchange rate fluctuation on the Nigerian economic growth

Abstract

This study investigates the impact of exchange rate fluctuation on the Nigerian economic growth and examines the possible direct and indirect relationship between exchange rate and GDP growth. The data for this study is a secondary data collected from central bank of Nigeria (CBN) and National Bureau of statistics (NBS) statistical bulletin various issues and is based on quarterly series from the period 1986 to 2013. The test of stationarity using Augmented Dickey Fuller (ADF) showed that all the variables were integrated of order one. The test of cointegration showed one cointegration vector which confirmed the existence of a long run relationship among the variables. The relationship is derived in two ways using a simultaneous equation model within a fully specified (but small) macroeconomic model and a Generalized Method of Moments (GMM) technique. The estimation result showed that there is evidence of a strong direct relationship between changes in exchange rate and GDP growth. It also showed that Nigerian economic growth has been directly affected by monetary factors. These factors have tended to sustain a pattern of real exchange rate depreciation, which has been unfavorable for growth. The conclusion is that improvements in exchange rate management are necessary but not adequate to revive the Nigerian economy. A broad program of economic reform is required, to complement the exchange rate policy.

Keywords: Exchange Rate, Economic Growth, GMM, Instruments, cointegration, Unit Root.