ABSTRACT

This study evaluates the relationship between exchange rate fluctuations and its impact on the Nigerian economic growth. This study made use of secondary annual data from

the Central Bank of Nigeria (CBN)’s statistical bulletin & publications from the National Bureau of statistics (NBS). This study adopted the classical least regression model and ordinary least square method (OLS) to analyze the data. This study has been able to demonstrate that exchange rate fluctuations is pivotal to the economic growth of Nigeria, other economic variables used in this study ((EXR) exchange rate, (INT) interest rate, (INF) inflation rate and (TB) trade) may result in a direct impact on the Nigerian economic growth. The study concludes that Since exchange rate fluctuation has a direct impact on the economy. There is need to develop an effective exchange rate regime. An efficient exchange rate would help to curtail inflation, improve Nigeria’s balance of

trade, and boost Nigeria’s production capacity which are key indicators of positive economic growth.

TABLE OF CONTENT

Title page…………………………………………………………………………………………………….. i

Declaration………………………………………………………………………………………………… ii

Approval page…………………………………………………………………………………………….. iii

Dedication………………………………………………………………………………………………… iv

Acknowledgement……………………………………………………………………………………… v

Abstract……………………………………………………………………………………………………. vi

Table of content………………………………………………………………………………………… vii

List of figures……………………………………………………………………………………………… ix

List of tables…………………………………………………………………………………………………. x

CHAPTER ONE: INTRODUCTION

• Background of the study………………………………………………………………………….. 1
  • Statement of the problem………………………………………………………………………….. 10
  • Objective of the study………………………………………………………………………………. 11
  • Formulation of research hypothesis……………………………………………………………… 12
  • Significance of the study………………………………………………………………………….. 12
  • Limitations of the Study…………………………………………………………………………… 13
  • The scope of the study……………………………………………………………………………… 13

CHAPTER TWO: REVIEW OF RELEVANT LITERATURE

• Conceptual Framework…………………………………………………………………………… 14
  • Theories of Exchange rate………………………………………………………………………… 17
    • Optimum currency area theory (OCA)………………………………………………………… 17
    • Mint parity Theory………………………………………………………………………………….. 19
    • Purchasing power parity………………………………………………………………………….. 20
    • Balance of payment/modern theory…………………………………………………………… 24
    • The Elasticity approach…………………………………………………………………………….. 28
  • Empirical literature…………………………………………………………………………………… 30
  • Limitations of previous studies…………………………………………………………………. 40
  • Definition of terms………………………………………………………………………………….. 43

CHAPTER THREE: RESEARCH METHODOLOGY

• Model specification………………………………………………………………………………… 48
  • Method of evaluation……………………………………………………………………………… 50
  • Statistical test (first order)………………………………………………………………………… 52
  • Economic second order test……………………………………………………………………… 52
  • Nature and source of data…………………………………………………………………………. 53

CHAPTER FOUR: ANALYSIS, RESULTS AND DISCUSSION

• Presentation & interpretation of result………………………………………………………….
  • Results of Granger-Causality Test……………………………………………………………… 55
  • Results of Augmented Dicky Fuller Test (ADF)…………………………………………… 57
  • Result of Cointegration analysis………………………………………………………………… 59
  54

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

• Summary of findings…………………………………………………………………………………. 61
  • Conclusion……………………………………………………………………………………………….. 62
  • Policy recommendation……………………………………………………………………………….. 62

REFERENCES……………………………………………………………………………………………… 64

APPENDIX……………………………………………………………………………………………………. 67

LIST OF FIGURES

Figure 1: Patterns of exchange rate, showing the different rate regimes…………………….. 3

Figure 2: movement of exchange rate, supply of money and gross domestic product… 6

Figure 3: movement of exchange rate & external reserve…………………………………………. 7

Figure 4: Trend of exchange rate & selected macroeconomic indicators in Nigeria (1980

– 2010)

…………………………………………………………………………………………….9

LIST OF TABLES

Table 1.1: Descriptive statistics results………………………………………………………………….. 54

Table  1.2:  Results  of  Granger-Causality test…   55

Table 1.3a: Results of ADF  –  Unit  Root test…   57

Table 1.3b: Results of ADF  –  Unit  Root test…  58

Table        1.3c:        Results         Cointegration analysis    58

CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND OF THE STUDY

Nigeria aims to become one of the leading developed economies in the world by the year 2050 (Obi et al, 2016). A crucial strategy towardsobtaining this aspirationis the development of a well-structured exchange rate policy.

Exchange rate refers to the amount units of aeconomy’s currency (the home country) when it comes to another economy’s currency. It is the recommended number of denominations of a currency that can purchase one or more units of another country’s currency. Hence, exchange rate is bestexplained as the value of one currency in respect of another (Mordi 2006).

Ngerebo–a and Ibe (2013) define exchange rate as the portion of a unit of one medium of exchange to the unit of another medium of exchange at a specific time. It decides the general cost of homegrown and externalmerchandise, including the quality of foreign sector involvement in global trade.

Hossain (2002) states that the exchange rate assist to link the value structure of two dissimilarnations by providing a global platform for trade, which directly influences the magnitude of imports and exports, and a nation’s balance of payment positions.

Exchange rate can therefore be considered as the global price meter for the

competitiveness of a country’spublic enterprise.Animportant aim of public sector policy is the rapid growth of the economy, and a key statistic of economic growth is a rise in the quantity of merchandizes and services manufactured in the country. Therefore, growth is taking placewhen a nation’s abilityto produce is on the rise (Akpan, 2008).The manufacturing of commodities and services refers to the volume of both domesticand exported goods of a country, on the one hand, in comparison to the volume of merchandise and services being brought into the country.

The volume of transactions carried out as result of these two forms of products involves transactions in foreign exchange, and hence the need for an effective exchange rate policy by the country.

Historical Analysis.

Development of exchange rate policy in Nigeria.

An exchange rate policy is designed to determine a stable andappropriate value of exchange between the home country’s medium of exchange and the overseasmedium of exchange involved in trade negotiations. In Nigeria, efforts have been made over the years to achieve this objective, through various techniques and options.

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