EFFECT OF EXCHANGE RATE FLUCTUATIONS ON THE NIGERIA ECONOMY: ECM ANALYSIS

Abstract

The study investigated the effect of exchange rate fluctuations on the Nigerian economy for the period 1986-2021 employing Error correction model. Annual time series data was used and the study specifically sought to, determine the effect of Monetary Policy Rate instability on the Nigerian Economy, ascertain the impact of Interest Rate instability on the Nigerian Economy, determine the causal relationship between Inflation Rate instability and the Nigerian Economy. Gross Domestic Product is the dependent variable of this study, while inflation rate, interest rate monetary policy rate are the independent variables.

Design/Methodology/ Approach: We applied in our analysis, Phillips- Perron unit root Test, Johansen test for co-integration among variables, Error Correction Model (ECM) was adopted to investigate the linkage of these variables to the Nigerian economy.

Findings: The co-integration test confirms that there is a long run relationship between Exchange Rate instability and the Nigerian Economy. The estimated result shows that the exchange rate instability has no significant and negative influence on Gross Domestic Product in Nigeria during the period.

Implication: The result therefore suggested that devaluation of the domestic currency does not lead to improvement in the Exchange Rate stability and hence GDP position of the country

Originality/Value added: It was therefore recommended that measures to stabilize exchange rate and check its continuous free fall should be carefully considered as a policy option under fiscal policy measures. Both fiscal and monetary authorities should collectively develop the political will to implement policies that will boost Nigeria production base to maximize the gains from foreign exchange flow