Real Exchange Rate and Macroeconomic Performance: Testing for the Balassa-Samuelson Hypothesis in Nigeria

Abstract

The study examines whether a link exists between the Naira real exchange rate and macroeconomic performance and test for the existence of the 'Balassa-Samuelson' (1964) hypothesis in Nigeria. Using data covering 1970 to 2009, the parsimonious ECM result shows that the one period lag value of technological productivity has a negative sign and is statistically significant. This suggests the existence of the Balassa-Samuelson hypothesis in Nigeria. The Johansen cointegration test suggests a long run relationship among technological productivity, foreign private investment, the ratio of government expenditure to GDP and the real effective exchange rate. It is thus recommended that the government and policy makers should continue to employ policies that could increase productivity in all sectors of the economy to enhance exchange value of the Naira.