THE REAL EXCHANGE RATE INSTABILITY: THE NIGERIAN EXPERIENCE (1973-1996)
THE REAL EXCHANGE RATE INSTABILITY: THE NIGERIAN EXPERIENCE (1973-1996)
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Date
2000
Authors
SHEHU, EL-RASHEED
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Abstract
The study undertakes an analysis of the causes of
fluctuations in Nigeria's Real exchange rate over the period
1973-96. The study period was divided into two sub periods
1973-86, and 1986-96 and the real exchange rate instability
indices for the two periods were calculated using coefficient
of variation method. The result shows a greater degree of
instability in real exchange rate over the period 1973-86 than
the later period, 1986-96. This signifies that the period
1973-86 had more inconsistencies in macroeconomic, trade, and
exchange rate policies. Also, using a simple regression model
and Granger causality test, explanatory variables reflecting
Nigeria's real exchange rate changes were statistically
investigated. The estimated regression equation reveals that
fluctuations in the terms of trade and nominal exchange rate
changes were the major causes of Real exchange rate
instability in Nigeria over the period of study. Domestic
monetary and fiscal policies contributed to a lesser extend to
the volatility in real exchange rate.
The study reveals a unidirectional causal link from
Terms of trade to Real exchange rate without a feed back
effect. There existed also a negative causal relationship from
net capital inflow, growth in money stock, federal government
fiscal deficit, and the degree of openness to Real exchange
rate, which signifies a depreciating effect of the variables
on Real exchange rate.
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Suggestive measures from the analysis therefore are
policies which aim at stabilizing the terms of trade. This
can be done by balancing the Nigeria's external accounts. The
study advocates an exchange rate management policy following
the purchasing power parity approach targeted at noninflationary
fiscal and monetary policies which will help in
achieving both internal and external balance. Also to have a
strong realistic and stable exchange rate a unified exchange
rate system is recommended.
There should be a restraint in the growth in money stock
combine with prudent fiscal operations
Description
A THESIS SUBMITTED TO THE POSTGRADUATE SCHOOL,
AHMADU BELLO UNIVERSITY, ZARIA IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE
OF MASTER OF SCIENCE (M.Sc) IN ECONOMICS, 2000
Keywords
REAL,, EXCHANGE,, INSTABILITY:,, NIGERIAN,, EXPERIENCE (