ANALYSIS OF KEY DETERMINANTS OF EXCHANGE RATE STABILITY IN NIGERIA: An Autoregressive Distributed Lag (ARDL) and Nonlinear Autoregressive Distributed Lag (NARDL) Approach

Ilu, Ahmad Ibraheem (2020): ANALYSIS OF KEY DETERMINANTS OF EXCHANGE RATE STABILITY IN NIGERIA: An Autoregressive Distributed Lag (ARDL) and Nonlinear Autoregressive Distributed Lag (NARDL) Approach.

Abstract

This study analytically examines the key determinants of exchange rate stability in Nigeria which encompass GDP, Interest rate, Inflation rate, and Oil prices. Using annual data for the years from 1986 to 2018. For the period under review numerous theories were discussed in this study. At the onset this study began its analysis by conducting descriptive statistics of the time series. The standard deviation indicates that exchange rate is more volatile than all the series followed by oil price. The skewedness statistic reveals that only GDP was found to be negatively skewed all other variables remains positively skewed. The Jarque- Bera statistic indicates that Exchange rate, inflation rate and oil price were found to be normally distributed. Ramsey test affirms a linear relationship between exchange rate and GDP, Interest rate, Inflation rate, and Oil prices while the BDS test repudiate the claim and asserts that the relationship is nonlinear. The study in a bid to ascertain the true value of parameters employs both linear and nonlinear time series models to guide its analysis and empirical investigations. In the linear component, stationary analysis is performed by using ADF, PP and KPSS unit root test and the ARDL bounds testing approach for a long run relationship between the variables while in the nonlinear integral the KSS nonlinear unit root test and the NARDL bounds test was upheld. Bounds test establishes across the two models that long run relationship exist between exchange rate and its determinants. The empirical findings indicate that in the ARDL model the short run estimates reveals negatively related and statistically insignificant Oil prices, statistically insignificant and negatively related inflation and interest rates and GDP was found to be positively related and statistically significant to exchange rate. In the NARDL cluster the short run estimates of the model reveals that past values of exchange rate have a negative influence on exchange rate. After decomposing oil price into positive and negative shocks, it was found that positive oil price shocks on exchange rate is negatively related and statistically significant while the negative oil price shocks were found to be the reverse scenario of positive shocks. In same vein GDP was found to be negatively related and statistically significant to exchange rate. The long run estimates are a bit consistent with the short run estimates. All other variables except positive oil price shocks were found to be positive and negatively related and statistically insignificant to the exchange rate. Furthermore, CUSUM and CUSUMSQ tests reveal both models are dynamically stable. Finally, the study recommends that the CBN and the Federal Government intensify efforts to revamp other sectors of the economy, embed them in a medium-long-term diversification plan to revive the agricultural sector, improve and efficient taxation, and solidify the economy as a service-oriented and financially developed economic clime.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange rate, Oil price, GDP, Interest rate, Inflation rate, ARDL and NARDL
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; F - International Economics > F0 - General; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance

References

Ajao and Igbokoyi . (2013). The determinants of real exchange rate volatility in Nigeria. Journal of International Studies, 2(1), 459-471. Ajao, G. M. and Igbekoyi, E. O. (2013). The Determinants of Real Exchange rate volatility in Nigeria. Academic Journal of Interdisciplinary StudiesVol 2 No 1,, 459. Akpan. (2008). Foreign exchange market and economic growth in an emerging petroleum based Economy, evidence from Nigeria. evidence from Nigeria (1970-2003), African economic and business review 6(2), 46-58. Aliyu, S. (2009). Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Empirical Investigation. Research Journal of International Studie. Aliyu, S. U. (2011). Real Exchange Rate Misalignment: An Application of. Central Bank of Nigeria Occasional paper (p. No 41). Central Bank of Nigeria. Arslaner, F., K. Dogan, A. Nuran and H.K. Suleyman. (2014). The relationship between inflation targeting and exchange rate pass- through in turkey with a model averaging approach. Central bank of the republic of turkey working paper, (14/6). . Asher, O. (2012). The impact of exchange rate fluctuation of the Nigerian economic growth (1980-2010). unpublished B.S.C Thesis of caritus university, Eme, Enugu state. Benson , U.O and Victor, E.O. (2012). Real Exchange Rate and Macroeconomic Performance: Testing for the Balassa-Samuelson Hypothesis in Nigeria. International Journal of Economics and Finance: 4 (2), 127-134. Brock, W. A. ( 1987). A Test for Independence Based on TheCorrelationDimension.Department of Economics, University of Wisconsin at Madison, University of Houston, and university officials. Brooks, C. (2008). Introductory Econometrics for Finance. The Economic Journal (Second Edi, Vol.113). Retrieved from https://doi.org/10.1111/1468-0297.13911 D. Kwiatkowski, D., P.C.B. Phillips, P. Schmidt and Y. Shin. (1992). Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root. Journal of Econometrics,15978. Dada A. and Oyeranti A. (2012). Exchange Rate and Macroeconomic Aggregates in Nigeria. Journal of Economics and Sustainable Development Vol.3. Dornbusch, R. (1988). Open macroeconomics 2nd Edition. New York. Eltayeb, E. K. (2016). Determinants of Exchange Rate Stability in Sudan (1991-2016). International Journal of Economics and Financial Issues, 33-39. Frimpong, S. and Adam, A.M. (2010). Exchange rate pass-through in Ghana . Int. Bus. Res., 3:, 186-192. George Kapetanios, Yongcheol Shinb and Andy Snell. (2003). Testingfor a unit root in the nonlinear STAR. Journal of Econometrics 112 , 359 – 379. Goldberg, Pinelopi K. and Michael M. Knetter . (1997). “Goods Prices and Exchange Rates: What Have We Learned?”. Journal of Economic Literature, Vol. 35, No. 3, 1243-1272. Guitan, M. (1976). The Effects of Changes in exchange Rate on Output, Prices and The balance of Payments. Journal of International Economics, Vol.6, 65-74. Imimole B and Enoma A. (2011). exchange rate depreciation and inflation in Nigeria (1986-2008). Business and Economic journal, volume 2011;BEJ-28. J.Frankel. (2007). On the Rand, Determinants of the south African exchange Rate. CID working paper N0 139. Jhingan M.L. (2003). Money, banking, international trade and public finance. New A.S. offset . Johansen and Juselius. (1990). Maximum Likelihood Estimation and Inference on Cointegration-With Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52(2), 169210. Kandil .M. (2004). The effects of exchange rate fluctuations on output and prices, evidence from developing countries. IMF working paper, wp/03/200. Karunanithi Kriskkumar and Niaz Ahmad Mohd Naseem. (2019). Analysis of oil Price effect on Economic Growth of ASEAN Net Oil Exporters. MDPI. Kruse, R. (2011). A new unit root test against ESTAR based on a class. ECON STOR. Llaudes, R. (2007). Monetary Policy Shocks in a two-sector open Economy: An Empirical Study. ECB working paper No 441. M.D. Galadima and A.A. Wambai. (2017). EXAMINING THE PRESENCE OF NONLINEAR RELATIONSHIP BETWEEN NATURAL GAS CONSUMPTION AND ECONOMIC GROWTH IN NIGERIA. Journal of Management and Science, ISSN: 2249-1260 | e-ISSN: 2250-1819 | Vol.7. No.4. M.H. Pesaran and B. Pesaran. (1996). Microfit 4.0, Cambridge London. Windows Version, CAMFIT DATA LIMITED. M.H. Pesaran, R.J. Smith, and Y. Shin. (1996b). Testing for the Existence of a long run Relationship. DAE Working paper No.9622, Department of Applied Economics, University of Cambridge. Mapenda, R. (2010). Exchange rates behaviour in Ghana & Nigeria: Is there a Misalignment? Department of Economics and Economic History, Rhodes University, Graham’s town. Miloud Lacheheb and Abdallah Sirag. (2016). Oil Price and Inflation in Algeria: A Nonlinear Approach. Mohamed Isse Ibrahim and Ahmed Ibrahim Nageye . (2017). DETERMINANTS OF EXCHANGE RATES IN SOMALIA. Asian Journal of Economic Modelling , 233-244. Mordi, C. (2006). Challenges of exchange rate volatility in economic management in Nigeria. 17-25. Muço, M., P. Sanfey and A. Taci. (2004). Inflation, exchange rates and the role of monetary policy in Albania. Working. Retrieved from https://scholar.google.com.tr/scholar?q=Marta%2C+M.%2C+S.+Peter+and+T.+Anita%2C+2004.+Inflation%2C+exchange+rates+and+the+role+of+European+bank+for+reconstruction+and+development&btnG =&hl=en&as_sdt= 0%2C5 Narayan, P. (2005). The saving and investment nexus for China: Evidence from cointegration tests. Appl. Econ. Ngozi E. Nwachukwu, Racheal O. Adebayo, Abdullahi M. Shettima, John O. Anigwe and Chidinma T. Udechukwu-Peterclaver1 . (2016). Real Effective Exchange Rate Misalignment in Nigeria . CBN Journal of Applied Statistics Vol. 7 No. 1(a). Nucu, A. (2011). Relationship between exchange rate and key macroeconomic indicators, case study Romania. The Romanian Economic Journal, 14(41), 127-145. Ozturk.I. (2006). Exchange rate volatility and trade. International journal of Applied Econometrics and Quantitative studies vol 3-1. P. Phillips and P. Perron. (1988). Testing for a Unit Root in Time Series Regression. Bimetrika, 75, 335346. P.Takaendesa. (2006). The behaviour and fundamental determinants of real exchange rate in south Africa . A Master’s Thesis submitted to Rhodes university, south Africa. Pesaran, M.H., Shin, Y., Smith, R.J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. Razafimahefa, I. (2012). Exchange Rate Pass-Through in Sub-Saharan African Economies and its Determinants. Working Paper No. 12/141. International Monetary Fund. Sanusi, J. (2004). Exchange Rate Mechanism: The Current Nigerian Experience. A Paper Presented At The Nigerian British Chamber Of Commerce. Shin, Y.; Yu, B.; Greenwood-Nimmo, M. (2011). Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework. In Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications;. pp. 281–314. . Uddin, K.M.K., G.M.A.A. Quaosar and D.C. Nandi. (2013). Factors affecting the fluctuation in exchange rate of the Bangladesh: A co-integration approach. International Journal of Social Sciences, 18(1, 1-12. Woo, W. (1984). Exchange rates and the prices of nonfood nonfuel products. Brooking Papers On Ekonomic Activity. 2,, pp. 511-530.