An Empirical Investigation of the Determinants of Foreign Exchange in Nigeria
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Date
2018-06-25
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Archives of Business Research
Abstract
The determinants of foreign exchange rate was carried out using time series data from 1986 to 2016.This analysis attempted to find out the casual relationship between external reserves and foreign exchange rate in the Nigerian context by looking at the impact of foreign exchange rate on external reserves from 1986 to 2016 and after the financial crisis. The Nigeria economy is a mono economy where the import is stronger than export making the Nigeria naira irrelevant in the global market. This prompted the researchers to undertake this study so as to establish a linear relationship between external reserves and other variables likely to affect foreign exchange rate. The theoretical framework of production and risk aversion and model specification variables applied in this study may have been overlooked by previous studies. The study found out that the Nigerian external reserves (RS= 0.000139) positively affect foreign exchange rate in a normal economic situation and negatively affect foreign exchange rate in a period of global financial crisis. In the period of global financial
crisis, the study recommends that the Nigeria government can increase her export to strengthen her currency so as to make her currency globally competitive. Furthermore, the external reserve is just a backup plan to cushion the effect of financial crisis and international liability in terms of balance of payment problem not as a core determinant of foreign exchange rate in Nigeria.
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Keywords
External reserves, Foreign exchange rate, Financial crisis, Risk aversion, Export
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