Real exchange rate misalignment and economic growth in Nigeria

Ali, Abdulkadir I. and Ajibola, Isaiah O. and Omotosho, Babatunde S. and Adetoba, Olutope O. and Adeleke, Abiola O. (2015): Real exchange rate misalignment and economic growth in Nigeria. Published in: CBN Journal of Applied Statistics , Vol. 6, No. 2 (2015): pp. 103-131.

Abstract

This paper investigates the impact of Naira real exchange rate misalignment on Nigeria's economic growth using quarterly data spanning the period 2000-2014. We derive estimates of Real Exchange Rate Misalignment (RERMIS) by computing deviations of the actual real exchange rate from a sustainable equilibrium path that is determined using the Behavioural Equilibrium Exchange Rate (BEER) approach of Edwards (1989). Our modelling approach accounts for the possible effects of endogeneity and structural breaks in the estimated relationships. In terms of the extent of RERMIS, results show that the Naira was on the average overvalued by 0.17 per cent during the study period. The Gregory and Hansen procedure provides evidence of co-integration between output and its determinants with a structural break in 2003Q2. Furthermore, we found empirical support for a negative impact of RERMIS on economic growth. In view of these findings, the study recommends the continued use of market-based exchange rate arrangements as a way of ensuring that the Naira real exchange rate follows its path of sustainable equilibrium. This would complement other government policies aimed at promoting economic growth in the country.

• Item Type: MPRA Paper
• Language: English
• Keywords: Real exchange rate misalignment, economic growth, error correction model, co-integration, structural break
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E65 - Studies of Particular Policy Episodes; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

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