ASSESSMENT OF SHORT RUN AND LONG RUN DETERMINANTS OF EXCHANGE RATE IN NIGERIA 1980 TO 2015

Abstract

This study is based on the investigation of the determinants of exchange rate in Nigeria using time series data from 1980 to 2015 and employed Autoregressive Distributed Lagged Model (ARDL) and Error Correction Mechanism (ECM) to capture both the short-run and long run determinants of exchange rate in Nigeria. The results revealed that the past value of interest rate, current inflation rate and current government expenditure causes the Nigeria exchange rate to appreciate, hence, they have a negative relationship with the exchange rate while past value of exchange rate, current value of interest rate, past value of trade openness, past value of government expenditure and current value of foreign direct investment causes depreciation of the Nigeria exchange rate due to their positive relationship with the exchange rate. The author recommend that the monetary authority should employ strategies that will prevent the rise in the interest rate differentials and previous value of exchange rate as well increase the inflation rate by employing the expansionary monetary policy. In addition government should increase their consumption expenditure and reduce the openness of the Nigeria economy by employing trade barriers which will lead to appreciation of the Nigeria exchange rate. As such, the government should discourage the inflow of capital from foreign countries as they cause the Nigeria exchange rate to depreciate.