THE IMPACT OF EXCHANGE RATE VARIATIONS ON AGGREGATE DEMAND IN NIGERIA


THE IMPACT OF EXCHANGE RATE VARIATIONS ON AGGREGATE DEMAND IN NIGERIA 

ABSTRACT

The study is a critical Evaluation of the impact of Exchange rate variation on Aggregate Demand in Nigeria. These study made use of the ordinary least square (OLS) regression technique in analyzing the impact of Exchange Rate Variation On Aggregate Demand in Nigeria. There are also other variables that determine the impact of Exchange Rate Variations on Aggregate Demand in Nigeria: 1979 -2008. Findings from the paper show that  all the variables included in the models contributes in explaining the role of exchange rate on aggregate demand in Nigeria. These massive contributions of these variables may strongly depend on the circumstances in Nigerian economic environment. The starting point in reclaiming and re-inventing project in Nigeria is to squarely admit that oil and the manner we have designed to utilize it have constituted a stumbling block in Nigeria’s progress. Accordingly, there is need to pay specific attention to the contest of action and the production relations in the various sections of the economy.  

TABLE OF CONTENTS

Title Page = = = = = = = = = i

Approval Page = = = = = = = = ii

Dedication = = = = = = = = iii

Acknowledgement = = = = = = = iv

Abstract = = = = = = = = = v

Table of Content = = = = = = = vi

CHAPTER ONE

Introduction = = = = = = = = 1

1.1Background of the Study=====1

1.2 Statement of Problems = = = = = = 5

1.3 Objective of the Study = = = = = = 6

1.4 Statements of Hypothesis = = = = = 7

1.5 Scope and Limitations of the Study = = = 7

1.6 Significance of the Study = = = = = 8

CHAPTER TWO: LITERATURE  REVIEW

2.1 Review of Theoretical Literature = = = = 10

2.2 Exchange ate Determination Models = = = 11

2.2.1Flexible Price Monetary Model====12

2.2.2 Sticky Price Monetary Model = = = = 13

2.2.3 Equilibrium Model and Liquidity Model = = 14

2.2.4 Portfolio Balance Model = = = = = 15

2.3 An Overview of Exchange Rate Regimes = = 16

2.3.1 The Gold Standard Regime = = = = = 17

2.3.2 Flexible Exchange Rate Regime = = = = 18

2.3.3 The Crawling Peg Regime = = = = = 19

2.3.4 The Managed Float Regime = = = = = 20

2.3.5 The European Monetary System = = = = 21

2.4 An Evaluation of Exchange Rate Regimes in Nigeria = 22

2.4.1 The Pre – Sap ara = = = = = = 23

2.4.2 The Post –Sapara = = = = = = 24

2.5 Exchange Rate Determinants = = = = 26

2.5.1 Interest Rate = = = = = = = 28

2.5.2 Transaction Motive = = = = = = 29

2.5.3 Volume of International Transaction = = = 29

2.5.4 Political Instability = = = = = = 30

2.5.5 Policy Actions = = = = = = = 31

2.6 Review of Empirical Literature = = = = 32

2.6.1 Empirical Literature on the Study using Foreign

Data set = = = = = = = = = = = = = = = = = = = = = ==  =32     

2.6.2 Empirical Literature on the Study Using 

Nigerian Data set = = = = = = == = = = = = = = = = = =34

CHAPTER THREE: METHODOLOGY

3.1 An Overview of the Model = = = = = = = = = = = = = = = 49

3.2 Model Specification = = = = = = = = = == = = = = = = = = 50

3.3 Unit Root Test = = = = = = = = = = = = = = = = = = = = = = 52

3.4 Co Integration and Error Correction = = = = = = = = = = = 53

3.5.1  Economic Criteria = = = = = = = = = = = = = = = = = = = = 54

3.5.2  Statistical Criteria = = = = =  = = = = = =  = = = = = = = = = 54

3.5.3  Economics = = = = = = = = = = = = = = = = = = = = = = = = 54

CHAPTER FOUR:  PRESENTATION AND ANALYSIS OF RESULT

4.1 ADF Test for Stationary = =  = == = = = = = = =  = = ==  = 58

4.2 CO Integration Test = = =  = = = = = = = = = = = = = = = = 60 

4.3 Result from Modeling log of GDP  by OLS = = = = = =  =  62 

4.4 Economic Interpretation = = = = = = =  = = = = = = = = = =63 

4.5 Statistical Criteria  = = = = = =  = = = = = = = = = = = = = = 69

4.5.1 T. Value  = = = = = =  = = = = = = = = = = = = = = = = = = = 70 

4.5.2 F- Test = = = = = = = = = = = = = = = = = = = = = = = = = = 70

4.6 Evaluation based on econometric Criteria = = = =  = = = = 71 

4.6.2 Test for Hetrosedasticity   = = = = = = = = = = = = = = = = =71

4.6.3 Test for Multicollinearity = = = = = = = = = = = = = = = =  =73

4.6.4  Normality Test = = = = = = =  = = = = = = = = =  = == = = = 74  

4.6.5  Test for Adequacy of the Model = = = = = = = = = = = =  = 75 

4.7 Evaluation of the Hypothesis = = = = = = = = = = = =  = = = =76 

CHAPTER FIVE

5.1 Summary  = = =  = = = = = = = = = = = = = = = = = = = = = = 78  

5.2 Conclusion = = = = = =  = = = = = = = = = = = = = = = = = = = 79

5.3 Policy Implications = = = = = = = = = = = =  = = = = = = = = = 81

Bibliography = = = = = =  = = = = = = = = = = = = = = = = = = = = 85

CHAPTER ONE

INTROUDCTION

1.1 BACKGROUND OF THE STUDY

All over the world, policy makers have always been on the move to ensure that there is sustainable growth rate in the economies of the world.  As a result, a lot of economic factors have been brought to the fore to examine and investigate how they could be relevant in the achievement of their economic objectives.

In Nigeria, several government regimes have experimented on many economic factors (macroeconomic aggregates) to determine how economic growth could both be attained and sustained. Prior to the introduction of the structural adjustment programme (SAP) of 1986, that had exchange rate devaluation as  one of its policy measures, the economy of Nigeria ‘headed for the rocks’ and was highly distressed. This led to a decline in the country’s external reserves at a disturbing rate. The country’s debt stool was accumulated to an unfavorable level among others. In spite of this the naira exchange rate was overvalued leading to dexterous effect on the economy. It was opinioned  that exchange rate policy embarked upon by the Nigeria government, in August 1986,was to eliminate the observed distortions in the economy and bring about a sustainable growth in the economy.

 Since exchange influences the interaction of household, business firms, private financial institutions and the central bank, it implies that it could also affect aggregate demand in Nigeria. Knowing fully well that exchange rate is a real phenomenon; variations in relative prices affect both economic performance and aggregate demand. Hence, exchange rate is a relative price between domestic currency. For instance, if the exchange rate between British Pounds sterling and Nigeria Naira is N250 per Pound, it follows that one pound exchange for N250 in the world foreign (currency) exchange market.

Exchange rates are of two broad categories. They include:

1. The fixed exchange rate and

2. The flexible exchange rate

The fixed exchange rates are pegged rates within narrow range of values by the central bank on trade of currencies while the flexible exchange also called FLOATING exchange rate is the rate that is determined by the forces of demand and supply.  Government has little direct control on the foreign exchange market that is flexible in nature.

Variation of exchange rates over the years are known to have ripple effects on some other macroeconomic variables like aggregate demand.  This fact underscores the pertinence of exchange rate to the economic well being of countries that open their doors to international trade (Kombe, 2004). Due to the impact exchange rate regimes have on economies of the world, economists consider it vital to verify how their countries exchange rate are determined since different regimes of exchange rate show different economic effects (Kujis, 1998).

Exchange rate determination varies from country to country. Part exchange rate regimes in Nigeria have been directed to control the use of foreign exchange at official determined rates. However, current policy options have shown an interest in market- determined exchange rate most current records show that the CBN has adapted an exchange rate regime that is neither pegged nor floating but a combination of both regimes called the MANAGED FLOAT exchange rate. This research work intends to look into the determinants of exchange rate in Nigeria and the impact exchange rate variations exert on aggregate demand in Nigeria.

1.2 STATEMENT OF PROBLEM

Economic and political analysts have reached a consensus on what a good exchange rate is as well as how it could both be operated and sustained. In most economic papers and literature, the major issues have been the need for competitive exchange rate stability and structural adjustments in the promotion of this competitiveness. However, since exchange rate reveals competitiveness of exports from domestic economies to the outside world, the economic implication of its variations need to be ascertained so that good exchange rate policies that will be realistic in consonance with aggregate demand could be formulated, adopted and operated.

Therefore, this study aims at providing answers to the questions stated below in order to ensure that viability reigns in the market.

1) Are exchange rate and aggregate demand variable stationary?

2) Does exchange rate variations have affect any impact on aggregate demand?

3) To what extent does exchange rate affect aggregate demand in Nigeria?

1.3 OBJECTIVES OF THE STUDY

The specific objective of this economic study are:

1. To ascertain the impact of exchange rate variations on aggregate demand.

2. To estimate if there exists any casual relationship between exchange rate and aggregate demand.

1.4 STATEMENT OF HYPOTHESIS

The following null hypothesis are to be stated for the statistical significance and non – significance of data.

Hi: Exchange rate instability has no impact on aggregate demand in Nigeria.

H2: There is no casual relationship between exchange rate and aggregate demand in Nigeria.

1.5 SCOPE AND LIMITATIONS OF THE STUDY

The length of period within which this study covered is thirty years.  This falls between the periods of 1976 and 2006.  This essence of this is to enable the observation for the research work compensate for degree of freedom that could be cost.

1.6 SIGNIFICANCE OF THE STUDY

Research work of this kind is usually treated directly with the variables lifted from their sources.  However, in this study, the directives of Philips (1986), which states that they are statutory, will be adopted to be assured that the result from this work is reliable for other policy works.

Thus, the findings of this study will be of great importance to a lot of people.  Firstly, researchers carrying out research work on the influence of exchange rate in Nigeria would find this research work helpful. Secondly, policy makers who wish to formulate policies on the effects of exchange rate instability would find this research work handy. Thirdly, business firms and investors as well as exporters who need to know when it is convenient to operate in business and when it is not, would find this research work a present- help in their periods of economic decision- making. Again, the central bank of Nigeria, the monetary authorities (financial ministries and policy formulators would find this research work vital in regulating exchange rate regimes appropriately in terms of intervention of the government into the economic system through the central bank.  Finally, due to revolutionary steps taken in this research work, the end product of this study would add to knowledge, no matter how infinitesimal, as a contribution for a sustainable economic growth in Nigeria.

LITERATURE REVIEW   2.1 REVIEW OF THEORETICAL LITERATURE  

The importance of exchange rate policies in economic adjustments cannot be overemphasized as it has become the subject of considerable debate in many economies in the word today. Several economists in the world today have discovered that in the bid to achieve certain objectives, that are economy-wide in nature, the issue of exchange rate cannot be handled lightly. They try to see if the exchange rate instabilities affect other macroeconomic aggregates positively or negatively over time. Efforts have also been made to see if the economic problems of the Less Developed Countries (LDCs) could be tackled employing exchanging ate policy as a vital instrument. To this end, several exchange rate models were propounded by different economies in the world to suggest how exchange rate could, in the first place, be determined.

2.2     EXCHANGE RATE DERMINIATION MODELS exchange rate determination has been a crucial issue in economic research. As a result, several schools of thought propounded different ways by which exchange ate could be determined. Before the 1970’s the Keynesian model, which was developed by James Meode (1951), dominated the scene. In 1962 and 1963, it was amended by Marcus Fleming and Robert Murdell respectively to be known as the Mudell-Fleming model. However during the 1970s, other exchange rate models, which were based on considerations of stock equilibrium in the financial market internationally, were developed. 

 

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THE IMPACT OF EXCHANGE RATE VARIATIONS ON AGGREGATE DEMAND IN NIGERIA



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