Impact of fixed and flexible exchange rate on economic growth in Nigeria: A VECM approach

Abstract

Some of the authors of this publication are also working on these related projects: Determinants of Energy demand and willingness to pay for improved energy source View project Abstract The stability of exchange rate in Nigeria is a significant monetary policy target. The fact that monetary authorities in Nigeria have over the years made various efforts to minimize the huge divergence between the official, interbank/autonomous and parallel/ Bureau De change rates in Nigerian foreign exchange market through different exchange rates regimes such as the overall fixed and flexible exchange rates regimes overtime. Accordingly, this paper investigates the comparative analysis of the impact of fixed and flexible exchange rates management policies on economic growth of Nigeria for the period of 1980A-2016A: using vector error correction model (VECM). The empirical results indicated evidence of long run relationship among the variable of interest in the study and in all there is a positive impact of exchange rates management policies on economic growth of Nigeria. Another finding from the Granger causality test confirms a unidirectional short run causality that runs from real effective exchange rate (REER) to economic growth (RGDP). In addition, unidirectional causality that runs from oil price (OPR) to real interest rate (RIR) in Nigeria also exists. However, the need for policy intervention to review and correct the foreign exchange market segments distortions is highly recommended. Again, the Nigerian economy needs a standard set of export base diversification from its mono cultural oil export in order to boost the foreign exchange earnings of the Nigerian economy.