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. viii 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
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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 (
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