Juxtaposing Exchange Rate Volatility and Economic Growth Nexus in Nigeria
Keywords:
Real Exchange Rate, Nominal Exchange Rate, Purchasing Power Parity, Inflation Rate, Trade Openness, Economic GrowthAbstract
This study was undertaken to investigate the multifaceted challenges posed by exchange rate volatility in Nigeria and how they impact the national economy. The study juxtaposed exchange rate volatility with economic growth in Nigeria by modeling the effect of real exchange rate, nominal exchange rate, purchasing power parity, inflation rate and trade openness on Gross Domestic Product in Nigeria using time series econometric regression technique of the ordinary least square (OLS). From the result of the OLS, it is observed that real exchange rate, nominal exchange rate and purchasing power parity have a positive impact on GDP growth rate in Nigeria. On the other hand, inflation rate and trade openness has a negative impact on GDP growth in Nigeria. Thus, increase in inflation rate and trade openness will bring about a decline in GDP growth in Nigeria. From the regression analysis, it is also observed that real exchange rate, nominal exchange rate, purchasing power parity, inflation rate and trade openness are statistically significant in explaining economic growth in Nigeria. The F-test conducted in the study shows that the model has a goodness of fit and is statistically different from zero. In other words, there is a significant impact between the dependent and independent variables in the model. Finally, both R2 and adjusted R2 show that the explanatory power of the variables is moderately high and/or strong in explaining the economic growth in Nigeria. The standard errors show that all the explanatory variables were all low. The study recommends that address the real exchange rate volatility crisis like that of Nigeria today, governments should directly intervene in the foreign exchange market to influence the exchange rate. If the currency is undervalued, they may choose to revalue it to make their exports more competitive and correct the deviation from purchasing power parity among others.
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