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Rivers State University, Port Harcourt.
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| Title: | An Empirical Analysis of Real Exchange Rates and Potential Determinants |
| Author(s): | OKEME Emmanuel David, MOMODU Ayodele & GBARAYORKS Lewis |
| Abstract: | This research presents a comprehensive empirical analysis of real exchange rates in the Nigerian economy, spanning the extensive period from 1981 to 2021. Drawing on data from the Central Bank of Nigeria Statistical Bulletin and the World Bank Statistical Database, the study utilizes the Autoregressive Distributed Lag (ARDL) model to unravel intricate relationships between real exchange rates and determinants such as government capital expenditure, inflation rate, net capital inflows, and nominal exchange rates. The unit root results shows that there is mixed order of integration among the variables in the model, while the cointegration result using the F-bound test shows that there is a long-run relationship among the variables in the model. Findings illuminate nuanced dynamics, revealing short-term and long-term impacts of fiscal and monetary policies, trade intricacies, and global economic conditions on real exchange rates. Findings indicate that increased government capital expenditure leads to short-term appreciation of the real exchange rate, underlining the immediate fiscal impact on currency valuation. Additionally, a surge in the inflation rate is associated with short-term appreciation of the real exchange rate, emphasizing the delicate balance between inflation control and exchange rate stability. Net capital inflows show positive but no significant influence on short-term real exchange rate. Despite showing negative relationship in the long-run, the relationship remains insignificant. Furthermore, a weaker nominal exchange rate significantly and positively impacts short-term real exchange rate depreciation, aligning with Purchasing Power Parity (PPP) principles and highlighting implications for export competitiveness. The extended temporal scope enables identification of critical economic patterns. Importantly, the study provides key recommendations for policymakers. Balancing fiscal stimuli with long-term competitiveness, managing inflation for sustained stability, and judiciously considering trade dynamics are vital considerations. The research contributes nuanced insights to guide evidence-based policies, tailored specifically to the Nigerian economic landscape, promoting sustained growth, bolstered external competitiveness, and resilience against global economic shifts. |
| Keywords: | Real exchange rate, inflation rate, government capital expenditure, net capital inflows and nominal |
| Journal: | Economic and Social Science Review (ESR) |
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