Determinants of Exchange Rate Dynamics in Nigeria
Keywords:ARDL, Exchange rate dynamics, Nigeria, Shocks, SVAR
Current exchange rate models hardly beat a random walk in terms of their predictive power. This could be as a result of lumping the time frames of different exchange rate regimes when estimating exchange rate models. This e-study examined the determinants of exchange rate dynamics in Nigeria under the various exchange rate sub-regimes between the periods 1986-2020 using the monetary theory of exchange rate determination and expressing the interest variables in their relative forms rather than their absolute forms. The variables used are naira per dollar exchange rates, relative money supply, relative real gross domestic product, interest rate differential, relative inflation rates, oil price, trade openness and government capital expenditure. While the ARDL technique was employed to estimate the various exchange rate sub-regime models, the structural VAR model was employed to estimate the responses of exchange rates to nominal, demand and supply shocks. The data were sourced from secondary sources including various editions of the CBN statistical bulletin, the Nigeria Bureau of Statistics, the U.S Federal Reserve Bank, World Bank Development Indicators and the Organization of Petroleum Exporting Countries. This e-study revealed that the determinants are similar in terms of their nature on exchange rates across the various exchange rate sub-regimes considered, however there exist striking dissimilarities in terms of their magnitudes on exchange rates across the exchange rate sub-regimes considered. Specifically, the determinants of exchange rate dynamics in Nigeria under the; Second-tier foreign exchange sub-regime are relative real income, relative inflation and trade openness; Wholesale Dutch Auction System are relative inflation and oil price; Interbank Foreign Exchange Market are interest rate differential, relative inflation, oil price and trade openness. Demand and supply shock variables were also found to elicit strong responses from exchange rates overtime. This e-study recommended in addition to the implementation of trade policies that the government should have policies that increase the added value of exports in order to improve the quality of trade openness.
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Copyright (c) 2023 Victor Ibeto, Uju Ezenekwe, Geraldine Nzeribe, Kenechukwu Okeyika
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