Munich Personal RePEc Archive

Exchange Rate Management and Economic Growth: An FMOLS Approach

Kenny S, Victoria (2019): Exchange Rate Management and Economic Growth: An FMOLS Approach.

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Abstract

Exchange rate instability is menacing economic growth in Nigeria. Fluctuations, whether positive or negative, increases risk and discourages trade hence is not desirable for the economy. This study therefore examine exchange rate fluctuation during the different exchange rate regime, its impact on economic growth rate to determine which of the exchange rate regime significantly influence economic growth in Nigeria covering periods from 1981 to 2015. The method of data analysis employed Augmented Dickey Fuller (ADF) Unit Root Test, Co-integration test, Fully Modified Ordinary Least Square (FMOLS) estimation technique and diagnostic tests. The FMOLS result revealed that exchange rate, external reserve, money supply and capital input have significant impact on the economic growth of Nigeria; whereas labour shows no significant impact on economic growth in the long run. Also, the dummy variable indicates a negative insignificant coefficient which suggests that fixed exchange rate wouldn’t enhance the economy of Nigeria in the long run. This study concludes that sustained utilization of manage floating exchange rate regime in the country would significantly improve the domestic production leading to increase in the stock of external reserve in Nigeria. Therefore, the high frequency of change in exchange rate regime by the Central Bank of Nigeria (CBN) should be discouraged because exchange rate regime signifies a shock for currency markets. Likewise, the Federal government strives to accumulate external reserves and discourage the incessant sharing of the foreign earnings from crude oil exports between the federal, state and local governments.

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