This document summarizes a study that analyzes the impact of exchange rates on macroeconomic aggregates in Nigeria from 1970 to 2009. Using simultaneous equation models and vector-autoregressive models, the study finds no strong direct relationship between exchange rate changes and GDP growth in Nigeria. Rather, economic growth has been directly affected by fiscal and monetary policies and exports, which have sustained an overvalued exchange rate that has been unfavorable for growth. The conclusion is that improving exchange rate management is necessary but not sufficient to revive the Nigerian economy, and a broader program of economic reforms is required, including complementary restrictive monetary policy.
The Causal Analysis of the Relationship between Inflation and Output Gap in T...inventionjournals
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The purpose of the paper is to study dynamic relationships between the inflation and output gap by using Granger causality, Impulse response and variance decompositions analysis within VECM framework for the quarterly data over the first period of 2003 and second period of 2016. The results of the study indicate that the output gap Granger cause the inflation in Turkey both in short-and long-runs. Also, sign of the causality is negative and same causal relationships between two variables hold beyond the sample period. The results should be taken as an evidence of the conclusion that the output gap has important implications for the CBRT's monetary policy.
Macroeconomic stability in the DRC: highlighting the role of exchange rate an...IJRTEMJOURNAL
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This study is part of a macroeconomic approach and seeks to identify the role of the rate of
economic growth and the exchange rate in controlling the macroeconomic framework. The approaches adopted
in this paper are part of Keynesian thinking on macroeconomic stability using the macroeconomic stability
index proposed by Burnside and Dollars (2004) and A. Amine (2005). Our results argue that economic growth
is causing macroeconomic stability and that the exchange rate is negatively and significantly accounting for
macroeconomic stability in the Democratic Republic of Congo.
This study examines whether economic stability in Indonesia capable predicted by the model Mundell-Fleming. Prediction proxy stability of the interaction of fiscal and monetary policy. During Indonesia's economic stability is largely determined by the strength of economic fundamentals, while economic fundamentals are strongly influenced by fiscal and monetary policies. Therefore flemming Mundell predicts how strong the economic stability in Indonesia ?, the statement in the analysis by using a long-term predictions are Vector Autoregression. Research findings indicate patterns of interaction predictions variety of fiscal and monetary policy, both short term, medium term and long term. It turned out that fiscal policies are derived from taxes are more effective than government spending to control economic growth, investment and inflation, but government spending is more effective to control the exchange rate. The monetary policy of interest rates more effectively control the exchange rate and inflation, while the money supply is more effective in controlling the growth of economy and investment.
The Causal Analysis of the Relationship between Inflation and Output Gap in T...inventionjournals
Â
The purpose of the paper is to study dynamic relationships between the inflation and output gap by using Granger causality, Impulse response and variance decompositions analysis within VECM framework for the quarterly data over the first period of 2003 and second period of 2016. The results of the study indicate that the output gap Granger cause the inflation in Turkey both in short-and long-runs. Also, sign of the causality is negative and same causal relationships between two variables hold beyond the sample period. The results should be taken as an evidence of the conclusion that the output gap has important implications for the CBRT's monetary policy.
Macroeconomic stability in the DRC: highlighting the role of exchange rate an...IJRTEMJOURNAL
Â
This study is part of a macroeconomic approach and seeks to identify the role of the rate of
economic growth and the exchange rate in controlling the macroeconomic framework. The approaches adopted
in this paper are part of Keynesian thinking on macroeconomic stability using the macroeconomic stability
index proposed by Burnside and Dollars (2004) and A. Amine (2005). Our results argue that economic growth
is causing macroeconomic stability and that the exchange rate is negatively and significantly accounting for
macroeconomic stability in the Democratic Republic of Congo.
This study examines whether economic stability in Indonesia capable predicted by the model Mundell-Fleming. Prediction proxy stability of the interaction of fiscal and monetary policy. During Indonesia's economic stability is largely determined by the strength of economic fundamentals, while economic fundamentals are strongly influenced by fiscal and monetary policies. Therefore flemming Mundell predicts how strong the economic stability in Indonesia ?, the statement in the analysis by using a long-term predictions are Vector Autoregression. Research findings indicate patterns of interaction predictions variety of fiscal and monetary policy, both short term, medium term and long term. It turned out that fiscal policies are derived from taxes are more effective than government spending to control economic growth, investment and inflation, but government spending is more effective to control the exchange rate. The monetary policy of interest rates more effectively control the exchange rate and inflation, while the money supply is more effective in controlling the growth of economy and investment.
This paper provides an overview of inflation developments in Vietnam in the years following the doi moi reforms, and uses empirical analysis to answer two key questions: (i)
what are the key drivers of inflation in Vietnam, and what role does monetary policy play? and (ii) why has inflation in Vietnam been persistently higher than in most other emerging market economies in the region? It focuses on understanding the monetary policy transmission mechanism in Vietnam, and in understanding the extent to which monetary policy can explain why inflation in Vietnam has been higher than in other Asian emerging markets over the past decade.
This study investigated the relationship between premium exchange rate and output growth in
African oil producing countries between 1995 to 2018 using panel Vector Error Correction as estimation
technique Data for the study were sourced from World Bank Development indicator data base, IMF online data
base and Central Banks of the selected countries
Abstract: The theoretical relationship of the long-run equilibrium between real exchange rates and interest rate differentials is essentially derived from the Purchasing Power Parity (PPP) and the uncovered interest parity. However, empirical evidence on this long-run relationship has rather been inconclusive. While several authors are able to establish the long-run relationship between real exchange rates and interest rate differentials other could not found this relationship. The reason for lack of relationship in some of the studies is as a result of omitted variables (Meese and Rogoff, 1988). Therefore, attempt is made in this study to evaluate this relationship between real exchange rate and interest rate differential for the case of Nigeria by controlling for foreign exchange reserves. The paper uses monthly data for the period 1993:1-2012:12 and applies Autoregressive Distributed Lags (ARDL) model. The estimates suggest the existence of long-run relationship between real exchange rate, interest rate differential and foreign exchange reserves. In the long run, the exchange rate coefficient has a positive effect on the foreign reserves. However, the effect of interest rate differential is negative and statistically significant. On the short run dynamics, the finding indicates a non-monotonic relationship between real exchange rate, interest rate differential and foreign exchange reserves. The out-of-sample forecast indicates a better forecast using ARMA model as all Theil coefficients are close zero for all the horizons used in the model.
Asymmetric Co-integration between Exchange Rate and Trade Balance in ThailandPremier Publishers
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This paper empirically examines the long-run exchange rate pass-through into trade balance in Thailand. The study incorporates political stability in the short run model to ascertain its effect on the trade balance. Asymmetric co-integrating adjustment method proposed by Enders and Siklos (2001) is employed for the study. The empirical findings revealed that there exists an asymmetric cointegration relationship between exchange rate and trade balance as well as exchange rate and imports & exports volumes after conducting a momentum-threshold autoregressive (M-TAR) and threshold autoregressive (TAR) tests respectively. The results of the short run effects showed that political stability has no meaningful effect on trade balance of Thailand. The findings have further shown that changes in real exchange rate have contributed to the presence of trade balance deficit in Thailand during the period under study; which is most likely to be as a result of massive imports of crude oil between the late 1990âs and through to 2010.
This study examined the nature of the relationship between the macroeconomic variables and share prices using the Nairobi Securities Exchange All Share Index (NASI). The study used four macroeconomic variables namely; interest rate, inflation, exchange rate and gross domestic product (GDP) for the period January 2008 to December 2014. The study found a positive relationship between GDP and NSE share prices. Exchange rate was found to have an insignificant positive relationship with share prices while interest rates had negative relationship with share prices. Inflation rate was found to have significant negative relationship with share prices due to its effect on purchasing power. The study concluded that the four macroeconomic variables combined had strong positive and significant relationship with share prices. The macroeconomic variables accounted for 86.97% of changes in share prices. The study recommended that capital markets regulators and other government regulatory bodies should promote a stable macroeconomic environment in the country for optimal performance of shares and stock market at large.
Forecasting real economic growth by using the information contents of financial asset prices is one of the main themes in financial studies in recent years. Based on the micro-level stock data from Shenzhen Stock Exchange Market, the paper constructs a cross-section volatility measure using sample stocks, investigates the impact of stock price volatility on economic growth, and forecasts economic growth with stock prices volatility of different firm size. The empirical results indicate that stock price volatility is a good indicator for forecasting economic growth. The results also show that volatility of both large and small firms can be useful in forecasting economic growth. In addition, volatility of small firms can better predict economic growth.
After the fall of Bretton Woods System, exchange rates become the focus of researchers and politicians. When a floating exchange rate system was started researchers investigated the impact of exchange rate volatility on international trade but the development of derivative instruments changed the researchers focus from currency volatility towards the impact of currency appreciation or depreciation on international trade. The main objective of this research was to investigate the short run and long run relationship between Turkeyâs merchandise trade deficit and real effective exchange rate. The monthly data was collected from Central Bank of Republic of Turkey from March 2005 to September 2017. Autoregressive distributed lag (ARDL) approach and Error correction model (ECM) was used for the analysis. The finding shows that the variables have long run relationship but it is not significant at 5% significance level. The short run model also shows the insignificant results. These findings have the following policy implication: Turkey cannot improve the merchandise trade deficit by devaluating its currency.
Empirical literature on money demand is mainly based on the estimation of a long run relation by means of time-invariant cointergration approach. Taiwan has experienced the economic and financial regime change since 1979. The purpose of this paper is to test structural breaks in Taiwan long run money demand equation. We examine six of the most influential specifications proposed in the literature. The classical set of explanatory variables (e.g. income and interest rates) is extended on the base of a number underlying economic reasons related to financial, labor and international portfolio characteristics. The results suggest that international financial market variables and the classical specifications are the key determinants of structural instability observed in Taiwan broad money.
Long Run Impact of Exchange Rate on Nigeriaâs Industrial Outputiosrjce
Â
While many scholars have carried out a lot of research on the impact of exchange rate volatility and
price shocks on economic growth, this study departs from previous studies and seeks to provide suggestions for
Nigerian policy makers on the attainment of an ideal exchange rate necessary to boost industrialization and
industrial output. The economies of all the countries of the world are linked directly or indirectly through asset
and goods markets. This linkage is made possible through trade and foreign exchange. The price of foreign
currencies in terms of a local currency (i.e. foreign exchange) is therefore important to the understanding of the
growth trajectory of all countries of the world. The consequences of substantial misalignments of exchange rates
can lead to output contraction and extensive economic hardship. These therefore, bring up the issue of an ideal
exchange rate necessary for the achievement of a set of diverse objectives - economic growth, containment of
inflation and maintenance of external competiveness. This study employed the use of the ordinary least square
technique to examine the impact of exchange rate stability on industry output in Nigeria using annual time
series data from 1980 to 2013. The result of the study showed that domestic capital, foreign direct investment,
population growth rate, and real exchange rate were significant determinants of industrial output. The changes
in external balance and inflation were of little or no consequences to industrial output. Based on the findings,
the researcher recommended that conscious efforts should be made by government to fine-tune the various
macroeconomic variables in order to provide an enabling environment that stimulates industrial output and
eventual economic growth.
This paper investigates the extent of macroeconomic volatility caused by the transfer pricing behavior of multinational corporations. The study examined two possible transmission channels through which transfer pricing causes macroeconomic volatility, namely, terms of trade and budget policy channels. Using the EGARCH model with annual data on selected variables from 1980 to 2017, the paper found evidence of macroeconomic volatility caused by transfer pricing. The size of the shock from transfer pricing is high and statistically significant in the terms of trade and budget policy channels. Negative shock from multinational corporations shifting taxable income between high and low tax regimes had a larger effect than a positive shock on the countryâs budget policy. The volatility caused by transfer pricing was short-lived in the terms of trade channel. However, in the budget policy channel, past volatility of transfer pricing persisted for a longer period to explain current volatility.
This paper provides an overview of inflation developments in Vietnam in the years following the doi moi reforms, and uses empirical analysis to answer two key questions: (i)
what are the key drivers of inflation in Vietnam, and what role does monetary policy play? and (ii) why has inflation in Vietnam been persistently higher than in most other emerging market economies in the region? It focuses on understanding the monetary policy transmission mechanism in Vietnam, and in understanding the extent to which monetary policy can explain why inflation in Vietnam has been higher than in other Asian emerging markets over the past decade.
This study investigated the relationship between premium exchange rate and output growth in
African oil producing countries between 1995 to 2018 using panel Vector Error Correction as estimation
technique Data for the study were sourced from World Bank Development indicator data base, IMF online data
base and Central Banks of the selected countries
Abstract: The theoretical relationship of the long-run equilibrium between real exchange rates and interest rate differentials is essentially derived from the Purchasing Power Parity (PPP) and the uncovered interest parity. However, empirical evidence on this long-run relationship has rather been inconclusive. While several authors are able to establish the long-run relationship between real exchange rates and interest rate differentials other could not found this relationship. The reason for lack of relationship in some of the studies is as a result of omitted variables (Meese and Rogoff, 1988). Therefore, attempt is made in this study to evaluate this relationship between real exchange rate and interest rate differential for the case of Nigeria by controlling for foreign exchange reserves. The paper uses monthly data for the period 1993:1-2012:12 and applies Autoregressive Distributed Lags (ARDL) model. The estimates suggest the existence of long-run relationship between real exchange rate, interest rate differential and foreign exchange reserves. In the long run, the exchange rate coefficient has a positive effect on the foreign reserves. However, the effect of interest rate differential is negative and statistically significant. On the short run dynamics, the finding indicates a non-monotonic relationship between real exchange rate, interest rate differential and foreign exchange reserves. The out-of-sample forecast indicates a better forecast using ARMA model as all Theil coefficients are close zero for all the horizons used in the model.
Asymmetric Co-integration between Exchange Rate and Trade Balance in ThailandPremier Publishers
Â
This paper empirically examines the long-run exchange rate pass-through into trade balance in Thailand. The study incorporates political stability in the short run model to ascertain its effect on the trade balance. Asymmetric co-integrating adjustment method proposed by Enders and Siklos (2001) is employed for the study. The empirical findings revealed that there exists an asymmetric cointegration relationship between exchange rate and trade balance as well as exchange rate and imports & exports volumes after conducting a momentum-threshold autoregressive (M-TAR) and threshold autoregressive (TAR) tests respectively. The results of the short run effects showed that political stability has no meaningful effect on trade balance of Thailand. The findings have further shown that changes in real exchange rate have contributed to the presence of trade balance deficit in Thailand during the period under study; which is most likely to be as a result of massive imports of crude oil between the late 1990âs and through to 2010.
This study examined the nature of the relationship between the macroeconomic variables and share prices using the Nairobi Securities Exchange All Share Index (NASI). The study used four macroeconomic variables namely; interest rate, inflation, exchange rate and gross domestic product (GDP) for the period January 2008 to December 2014. The study found a positive relationship between GDP and NSE share prices. Exchange rate was found to have an insignificant positive relationship with share prices while interest rates had negative relationship with share prices. Inflation rate was found to have significant negative relationship with share prices due to its effect on purchasing power. The study concluded that the four macroeconomic variables combined had strong positive and significant relationship with share prices. The macroeconomic variables accounted for 86.97% of changes in share prices. The study recommended that capital markets regulators and other government regulatory bodies should promote a stable macroeconomic environment in the country for optimal performance of shares and stock market at large.
Forecasting real economic growth by using the information contents of financial asset prices is one of the main themes in financial studies in recent years. Based on the micro-level stock data from Shenzhen Stock Exchange Market, the paper constructs a cross-section volatility measure using sample stocks, investigates the impact of stock price volatility on economic growth, and forecasts economic growth with stock prices volatility of different firm size. The empirical results indicate that stock price volatility is a good indicator for forecasting economic growth. The results also show that volatility of both large and small firms can be useful in forecasting economic growth. In addition, volatility of small firms can better predict economic growth.
After the fall of Bretton Woods System, exchange rates become the focus of researchers and politicians. When a floating exchange rate system was started researchers investigated the impact of exchange rate volatility on international trade but the development of derivative instruments changed the researchers focus from currency volatility towards the impact of currency appreciation or depreciation on international trade. The main objective of this research was to investigate the short run and long run relationship between Turkeyâs merchandise trade deficit and real effective exchange rate. The monthly data was collected from Central Bank of Republic of Turkey from March 2005 to September 2017. Autoregressive distributed lag (ARDL) approach and Error correction model (ECM) was used for the analysis. The finding shows that the variables have long run relationship but it is not significant at 5% significance level. The short run model also shows the insignificant results. These findings have the following policy implication: Turkey cannot improve the merchandise trade deficit by devaluating its currency.
Empirical literature on money demand is mainly based on the estimation of a long run relation by means of time-invariant cointergration approach. Taiwan has experienced the economic and financial regime change since 1979. The purpose of this paper is to test structural breaks in Taiwan long run money demand equation. We examine six of the most influential specifications proposed in the literature. The classical set of explanatory variables (e.g. income and interest rates) is extended on the base of a number underlying economic reasons related to financial, labor and international portfolio characteristics. The results suggest that international financial market variables and the classical specifications are the key determinants of structural instability observed in Taiwan broad money.
Long Run Impact of Exchange Rate on Nigeriaâs Industrial Outputiosrjce
Â
While many scholars have carried out a lot of research on the impact of exchange rate volatility and
price shocks on economic growth, this study departs from previous studies and seeks to provide suggestions for
Nigerian policy makers on the attainment of an ideal exchange rate necessary to boost industrialization and
industrial output. The economies of all the countries of the world are linked directly or indirectly through asset
and goods markets. This linkage is made possible through trade and foreign exchange. The price of foreign
currencies in terms of a local currency (i.e. foreign exchange) is therefore important to the understanding of the
growth trajectory of all countries of the world. The consequences of substantial misalignments of exchange rates
can lead to output contraction and extensive economic hardship. These therefore, bring up the issue of an ideal
exchange rate necessary for the achievement of a set of diverse objectives - economic growth, containment of
inflation and maintenance of external competiveness. This study employed the use of the ordinary least square
technique to examine the impact of exchange rate stability on industry output in Nigeria using annual time
series data from 1980 to 2013. The result of the study showed that domestic capital, foreign direct investment,
population growth rate, and real exchange rate were significant determinants of industrial output. The changes
in external balance and inflation were of little or no consequences to industrial output. Based on the findings,
the researcher recommended that conscious efforts should be made by government to fine-tune the various
macroeconomic variables in order to provide an enabling environment that stimulates industrial output and
eventual economic growth.
This paper investigates the extent of macroeconomic volatility caused by the transfer pricing behavior of multinational corporations. The study examined two possible transmission channels through which transfer pricing causes macroeconomic volatility, namely, terms of trade and budget policy channels. Using the EGARCH model with annual data on selected variables from 1980 to 2017, the paper found evidence of macroeconomic volatility caused by transfer pricing. The size of the shock from transfer pricing is high and statistically significant in the terms of trade and budget policy channels. Negative shock from multinational corporations shifting taxable income between high and low tax regimes had a larger effect than a positive shock on the countryâs budget policy. The volatility caused by transfer pricing was short-lived in the terms of trade channel. However, in the budget policy channel, past volatility of transfer pricing persisted for a longer period to explain current volatility.
The Nigerian Government both previous and present has introduced several policies and programmes to reduce or proffer remedial measures to militate against the negative impact of high inflationary levels on the Nigerian economy. All these measures have not led to a productive result as the inflation rate has continued to sour higher over the years. This paper aimed at examining the economic influence of the determinant factors that influence inflationary trends that are multi-dimensional and dynamic which continue to defy solutions. The data used for this work was sourced from the National Bureau of Statistics and Central Bank of Nigeria, from 1983 to 2020. The ordinary least square approach was used to analyze the data and the result shows that consumerâs price index, interest rate and total export has a positive effect on Nigeria inflation, but only the Consumerâs Price Index (CPI) have a statistically significant effect on the Nigeria inflation at 99% confidence interval. Result also shows that the exchange rate, foreign reserve, money supply, real GDP, real income and total imports has a negative effect though not statistically significant on the Nigeria inflation rate. The result of the granger causality test shows exchange rate and total imports to granger cause Nigeria inflation. It is recommended that Government should improve locally manufacture products to meet international demands to reduce total imports.
The theoretical relationship of the long-run equilibrium between real exchange rates and interest rate differentials is essentially derived from the Purchasing Power Parity (PPP) and the uncovered interest parity. However, empirical evidence on this long-run relationship has rather been inconclusive. While several authors are able to establish the long-run relationship between real exchange rates and interest rate differentials other could not found this relationship. The reason for lack of relationship in some of the studies is as a result of omitted variables (Meese and Rogoff, 1988). Therefore, attempt is made in this study to evaluate this relationship between real exchange rate and interest rate differential for the case of Nigeria by controlling for foreign exchange reserves. The paper uses monthly data for the period 1993:1-2012:12 and applies Autoregressive Distributed Lags (ARDL) model. The estimates suggest the existence of long-run relationship between real exchange rate, interest rate differential and foreign exchange reserves. In the long run, the exchange rate coefficient has a positive effect on the foreign reserves. However, the effect of interest rate differential is negative and statistically significant. On the short run dynamics, the finding indicates a non-monotonic relationship between real exchange rate, interest rate differential and foreign exchange reserves. The out-of-sample forecast indicates a better forecast using ARMA model as all Theil coefficients are close zero for all the horizons used in the model.
EFFECTIVE MONETARY POLICY AS A RECIPE FOR MACROECONOMIC STABILITY IN NIGERIApaperpublications3
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Abstract: The basic objective of this paper was to investigate effective monetary policy as a recipe for macroeconomic stability in Nigeria, using annual time series data from 1981 to 2014. The paper employs OLS methodology with all the BLUE assumption. The results show that considering the magnitude, 1% increase in RGDP (proxy for economic growth) is brought about by 0.86% increase in narrow money supply (M1), 0.63% increase in broad money supply (M2), 258% decrease in inflation rate (INFLARATE), 1276.3% increase in lending rate (LEDRATE), and 143.9% increase in gross fixed capital formation. This implies that an increase in lending rate and other related variables will lead to a significant increase in real GDP, proxy for economic growth in Nigeria. The estimated value of R2 (goodness of fit) of 0.67 or 67% shows that 67% systematic variation in Real GDP is caused by variation in narrow money supply, broad money supply, inflation rate, lending rate, and gross fixed capital formation. This indicates that indeed, monetary policy has an effect on macroeconomic stability in Nigeria. The study seems to suggest that concerted efforts should be made by the government to focus on increment in narrow and broad money supplies which will aid in the financing of the countryâs monetary growth, balancing the price increase, stimulating increased spending, and further enhancing the countryâs macroeconomic variables.
The study gauged the influence of exchange rate fluctuations on the Performance of the Nigerian Economy over the time from of 1986 to 2016, utilizing secondary data tracked from the statistical report of the Apex Nigerian bank, and utilizing techniques such as Unit root test, Generalized autoregressive conditional heteroscedasticity (GARCH), Impulse-Response Output and Variance-Decomposition Test to evaluate variables such as Interest rate, inflation rate, exchange rate against a sole indicator of Economic Performance I.e. Gross Domestic Product Growth rate (GDPGR), it was discovered that despite the short run influx of the spill over volatility of Interest rate and inflation rate, there exist no long run volatility influence of interest rate on Economic Performance in Nigeria. It was therefore recommended that the apex financial institution and relevant policy makers should ensure an interest rate system and status that could stimulate growth or production and the nation should endeavour to utilize her interest rate in controlling its output level as it motivates Economic Performance (GDPGR).
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The European Unemployment Puzzle: implications from population agingGRAPE
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We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
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Exchange rate and macroeconomic aggregates in nigeria
1. Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.3, No.2, 2012
Exchange Rate and Macroeconomic Aggregates in Nigeria
Dada Eme A.
Department of Economics, University of Ibadan, Nigeria
dadaeme@gmail.com
Oyeranti Olugboyega A.
Dept. of Economics, University of Ibadan, Nigeria
oyert@yahoo.com
Abstract
This study analyses the impact of exchange rate on macroeconomic aggregates in Nigeria. Based on the annual
time series data for the period 1970 to 2009, the research examines the possible direct and indirect relationship
between the real exchange rates and GDP growth. The relationship is derived in two ways using a simultaneous
equations model within a fully specified (but small) macroeconomic model, and a vector-autoregressive model. The
estimation results show that there is no evidence of a strong direct relationship between changes in the exchange
rate and GDP growth. Rather, Nigeriaâs economic growth has been directly affected by fiscal and monetary policies
and other economic variables particularly the growth of exports (oil). These factors have tended to sustain a pattern
of real exchange rate over-valuation, which has been unfavourable for growth. The conclusion is that improvements
in exchange rate management are necessary but not adequate to revive the Nigerian economy. A broad program of
economic reform is required, which includes among others, a complementary restrictive monetary policy. On the
whole, the results are informative.
Keywords: Exchange rate, Macro-economy, Simultaneous equations, Nigeria.
1. Introduction
The issue of exchange rate management and macroeconomic performance in developing countries has received
considerable attention and generated much debate. The debate focuses on the degree of fluctuations in the exchange
rate in the face of internal and external shocks. There appears a consensus view on the fact that devaluation or
depreciation could boost domestic production through stimulating the net export component. This is evident
through the increase in international competitiveness of domestic industries leading to the diversion of spending
from foreign goods whose prices become high, to domestic goods. As illustrated by Guitan (1976) and Dornbusch
(1988), the success of currency depreciation in promoting trade balance largely depends on switching demand in
proper direction and amount as well as on the capacity of the home economy to meet the additional demand by
supplying more goods. On the whole, exchange rate fluctuations are likely, in turn, to determine economic
performance. It is therefore necessary to evaluate the effects of exchange rate fluctuations on output growth and
price inflation.
Exchange rate policies in developing countries are often sensitive and controversial, mainly because of the kind of
structural transformation required, such as reducing imports or expanding non-oil exports, invariably imply a
depreciation of the nominal exchange rate. Such domestic adjustments, due to their short-run impact on prices and
demand, are perceived as damaging to the economy. Ironically, the distortions inherent in an overvalued exchange
rate regime are hardly a subject of debate in developing economies that are dependent on imports for production
and consumption.
In Nigeria, the exchange rate policy has undergone substantial transformation from the immediate
post-independence period when the country maintained a fixed parity with the British pound, through the oil boom
of the 1970s, to the floating of the currency in 1986, following the near collapse of the economy between 1982 and
1985. In each of these epochs, the economic and political considerations underpinning the exchange rate policy had
important repercussions for the structural evolution of the economy, inflation, the balance of payments and real
income.
Some attempts have been made to conduct econometric studies on exchange rate determination and the movements
in output in Nigeria, Egwaikhde et al (1994); Odusola and Akinlo (2001); Ekpo (2003) among others. However,
many of these earlier studies were based on single equation regression approach. This study deviates from the
previous ones in Nigeria by the adoption of a simultaneous equation modeling approach and its structural variant in
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which movements in output are driven by several fundamental disturbancesâmonetary, exchange rates (official
and parallel), interest rate, and income.
The rest of the paper is presented in four sections. Section 2 reviews related literature. In section 3, exchange rate
polices in Nigeria are discussed. The empirical model and estimation is presented in section 4, while section 5
summarizes, and concludes the paper.
2. Theoretical Literature
The earliest and leading theoretical foundation for the choice of exchange rate regimes rests on the optimal
currency area (OCA) theory, developed by Mundell (1961) and McKinnon (1963). This literature focuses on trade,
and stabilization of the business cycle. It is based on concepts of the symmetry of shocks, the degree of openness,
and labor market mobility. However, since the links between the nominal exchange rate regime and
macroeconomic performance both counterbalance and reinforce each other, the OCA theory is unable to present an
unambiguous proposal for the optimal exchange rate regime. For example, according to the theory, a fixed
exchange rate regime can increase trade and output growth by reducing exchange rate uncertainty and thus the cost
of hedging, and also encourage investment by lowering currency premium from interest rates. However, on the
other hand it can also reduce trade and output growth by stopping, delaying or slowing the necessary relative price
adjustment process.
Later theories focused on financial market stabilization of speculative financial behaviour as it relates particularly
to emerging economies. According to the theory, a fixed regime can increase trade and output growth by providing
a nominal anchor and the often needed credibility for monetary policy by avoiding competitive depreciation, and
enhancing the development of financial markets (see Barro and Gordon (1983), Calvo and Vegh (1994), Edwards
and Savastano (2000), Eichengreen et al (1999), and Frankel (2003) among others).
On the other hand, however, the theory also suggests that a fixed regime can also delay the necessary relative price
adjustments and often lead to speculative attacks. Therefore, many developing and emerging economies suffer from
a âfear of floating,â in the words of Calvo and Reinhart (2002), but their fixed regimes also often end in crashes
when there is a âsudden stopâ of foreign investment (Calvo, 2003) and capital flight follows, as was evident in the
East Asian and Latin American crises and some sub-saharan African countries.
Not surprisingly, there is little theoretical consensus on this question of regime choice and subsequent economic
growth in the development economics literature as well. While the role of a nominal anchor is often emphasized,
factors ranging from market depth (or the lack of it), political economy, institutions and so on often lead to
inclusive suggestions as to which exchange rate regime is appropriate for a developing country (Frankel et al
(2001), Montiel (2003), Montiel and Ostry (1991)). The literature in development economics acknowledges the
importance of the effects of the level of development to the relationship between regime and growth (see Berg et al
(2002), Borensztein and Lee (2002), Frankel (1999), Lin (2001), McKinnon and Schnabl (2003), and Mussa et al
(2000) among others).
2.1 Empirical Literature
There is a vast body of empirical literature on the impacts of exchange rate devaluation on output and prices. In
many of the existing studies, it has been recognized that the possible effects of devaluation on output could be
contractionary. To this extent, several channels through which devaluation could be contractionary have been
identified.
First, Diaz-Alejandro (1965) examined the impacts of devaluation on some macroeconomic variables in
Argentina for the period 1955â61. He observed that devaluation was contractionary for Argentina because it
induces a shift in income distribution towards savers, which in turn depresses consumption and real absorption. He
equally observed that current account improved because of the fall in absorption relative to output.
Cooper (1971) also reviewed twenty-four devaluation experiences involving nineteen different developing
countries during the period 1959â66. The study showed that devaluation improved the trade balance of the
devaluing country but that the economic activity often decreased in addition to an increase in inflation in the short
term.
In a similar study, Gylfson and Schmid (1983) also constructed a log-linear macro model of an open economy for a
sample of ten countries using different estimates of the key parameters of the model. Their results showed that
devaluation was expansionary in eight out of ten countries investigated. Devaluation was found to be
contractionary in two countries (the United Kingdom and Brazil). The main feature of the studies reviewed above is
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and other developed nations. Only few studies have been conducted on the issue in Sub-Saharan Africa,
particularly Nigeria.
3. Developments in Exchange Rate Policy in Nigeria
The objectives of an exchange rate policy include determining an appropriate exchange rate and ensuring its
stability. Over the years, efforts have been made to achieve these objectives through the applications of various
techniques and options to attain efficiency in the foreign exchange market. Exchange rate arrangements in Nigeria
have transited from a fixed regime in the 1960s to a pegged regime between the 1970s and the mid-1980s and
finally, to the various variants of the floating regime from 1986 with the deregulation and adoption of the structural
adjustment programme (SAP). A managed floating exchange rate regime, without any strong commitment to
defending any particular parity, has been the most predominant of the floating system in Nigeria since the SAP.
Following the failures of the variants of the flexible exchange rate mechanism (the AFEM introduced in 1995 and
the IFEM in 1999) to ensure exchange rate stability, the Dutch Auction System (DAS) was re-introduced on July 22,
2002. The DAS was to serve the triple purposes of reducing the parallel market premium, conserve the dwindling
external reserves and achieve a realistic exchange rate for the naira. The DAS helped to stabilize the naira exchange
rate, reduce the widening premium, conserve external reserves, and minimize speculative tendencies of authorized
dealers. The foreign exchange market has been relatively stabilized since 2003.
As indicated by Mordi (2006), The conditions that facilitated the re-introduction of DAS in 2002 included, the
external reserve position which could guarantee adequate funding of the market by the CBN; reduce inflationary
pressures; instrument autonomy of the CBN and its prompt deployment of monetary control instruments in support
of the DAS as well as the bi-weekly auctions as against the previous fortnightly auctions, thus assuring a steady
supply of foreign exchange.
In order to further liberalize the market, narrow the arbitrage premium between the official inter-bank and bureau
de change segments of the markets and achieve convergence, the CBN introduces the Wholesale Dutch Auction
System (WDAS) on February 20, 2006. This was meant to consolidate the gains of the retail Dutch Auction System
as well as deepen the foreign exchange market in order to evolve a realistic exchange rate of the naira. Under this
arrangement, the authorized dealers were permitted to deal in foreign exchange on their own accounts for onward
sale to their customers.
3.1 Exchange Rate Movement and Macroeconomic Performance
Analysis of Nigeriaâs exchange rate movement from 1970-2010 showed that there exists a causal relationship
between the exchange rate movements and macroeconomic aggregates such as inflation, fiscal deficits and
economic growth. Consequently, the persistent depreciation of the exchange rate trended with major economic
variables such as inflation, GDP growth, and fiscal deficit/GDP ratio. In this context, the exchange rate movement
in the 1990âs trended with inflation rate. During periods of high inflation rate, volatility in the exchange rate was
high, which was reversed in a period of relative stability. For instance, while the inflation rate moved from 7.5 per
cent in 1990 to 57.2 per cent and 72.8 per cent in 1993 and 1995 respectively, the exchange rate moved from N8.04
to$1 in 1990 to N22.05 and N81.65 to a dollar in the same period. When the inflation rate dropped from 72.8 per
cent in1995 to 29.3 per cent and 8.5 per cent, in 1996 and 1997 respectively, and rose thereafter to 10.0 per cent in
1998 and averaged 12.5 per cent in 1999-2009, the exchange rate trended in the same direction. A similar trend was
observed for fiscal deficit/GDP ratio and GDP growth rate as shown in Figure 1.
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Figure 1: Trend of Exchange Rate and Selected Macroeconomic Indicators in Nigeria (1980-2010)
Source: Underlying data from Central Bank of Nigeria Statistical Bulletin Various Years
4. Framework
For the purpose of the analysis, Nigeria is treated as a small open developing economy, which is affected by world
market fluctuations. A simultaneous equations model is adopted to investigate the effect of the money supply,
inflation and the exchange rate on the real output growth of the manufacturing sector. To capture the inter-linkages,
based on the structure of the Nigerian economy a simple structural model of the Nigerian economy is estimated
which includes equations for inflation rate, real income growth, changes in the exchange rate and changes in
government revenue.
As a working definition of the real exchange rate, the nominal exchange rate is nominal exchange rate adjusted
with the ratio of the foreign price level (US CPI, as a proxy for the price of tradables) and the domestic price level
(Nigerian CPI as a proxy for price of non-tradables). This definition follows the purchasing power parity condition.
4.1 The model
The model employed in the research draws on the structural macroeconomic model of Khan and Knight (1991).2 It
includes all the basic elements of the financial programming framework used by the international Monetary Fund.
This work enhances the original Khan-Knight model by adding open economy indicators: exchange rate and
imports. The basic idea is to determine the relation between growth and exchange rate while allowing for other key
influences on both variables. These are presented accordingly.
The inflation equation
The specification considers the monetarist perspective and expresses inflation as functionally related to money
supply, real output, expected inflation and exchange rate, such that;
LnINF t =α0+α1lnMst + α2LnYr + α3 inft-1 + α4ext +Δt (1)
Where inf indicates inflation rate, MS is money supply (broadly defined); Yr is real output proxied by real GDP,
and inft-1 is a proxy for expected inflation while ex is exchange rate and Δ is the error term.
Income Equation
The income equation expresses real GDP as a function of monetary and fiscal variables such that;
LnYrt = ÎČ0+ ÎČ1lnMst + ÎČ2 Ln lnext + ÎČ3 lnex t-1 + ÎČ4 lninft + ÎČ5 lnyr t-1+ Δt (2)
The variables are as previously defined.
Exchange Rate Equation
Exchange rate is modeled as a function of fiscal and monetary variables. Such that;
2
See Khan and Knight (1991) for detailed specification of the model.
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LnExt = ” 0 + ” 1 LnYrt + ” 2 Lninft + ” 3 Lnext-1 ” 4 LnIMst + Δt (3)
Where IM refers to imports, while all other variables are as previously defined
Government Revenue Equation
Theoretically, exchange rate movements have some impacts on the general price level and some aspects of revenue
and expenditure. For instance a depreciation of the exchange rate raises interest charges and capital repayment on
external debt, hence an increase in overall government expenditure. The following relationship is thus, derived.
LnGORt = γ0+ γ1 LnYrt + γ2LnGRR + γ3LnGORt-1 + Δt (4)
Where GOR is real total government revenue, GRR is government retained revenue.
Definition of Variables
Lninft rate of inflation (P is the Nigerian Consumer Price Index)
Lninft-1 a proxy for the expected inflation rate at time t
LnYrt growth rate of nominal GDP (market prices)
Lnexrt real exchange rate
LnImt Real Imports
LnMst Money Supply
LnGORt Real government Revenue
LnGER Real Government Expenditure
Ln=Logarithm
t= time subscript
5. Data and Sources
The study employs annual data covering the period 1970-2008. This period is chosen as it corresponds to the period
where uniform and consistent data on the relevant variables are available. More importantly, this period witnessed
several exchange rate regimes. Data for the study was obtained from the IFS CD ROM 2009 and Central Bank of
Nigeria (CBN) Annual Report and Statement of Accounts. Specifically, money supply, real GDP and its deflator,
consumer price index and official exchange rate were drawn from the IFS CD ROM 2009. Government revenues
and expenditure were collected from Central Bank of Nigeria (CBN) Annual Report and Statement of Accounts,
various issues.
6. Estimation Strategy and Results
The system was estimated using Two-stage Least squares (2SLS). This method is explored to minimize the problem
of simultaneous equation bias. Prior to the estimation, unit root tests were performed on the series to determine
their stationarity using the Augmented Dickey-Fuller and Sargan Bhargava Durbin-Watson tests. Most series were
not stationary at levels and were differenced accordingly before being used in the estimation.
Next, a co-integration analysis was carried out to ascertain the existence of a long run relationship between the
dependent and independent variables. This was followed by the error correction mechanism. The outcome of the
integration process suggests that an error correction specification would provide a better fit than would the case
without it. The results for the estimated behavioural equations are presented below.
INF t = -0.074 + 0.426Mst -1.976 Yr + 0.167 inft-1 + 0.040ext - 0.2817ECMt-1
(2.073) (2.645) (3.672) (1.952) (2.436) (2.31)
R2 = 0.54
Yrt = -0.074 + 0.298Mst - 0.150ext + 0.342ex t-1 â 0.214inft + 0.345Yr t-1- 0.125ECMt-1
(1.354) (1.243) (1.145) (1.257) (2.349) (3.421) (2.130)
R2 = 0.62
Ext = -1.107 + 0.652Yrt + 0.452inft + 0.674ext-1 0.165Imst + 1.135ECMt-1
(0.942) (1.240) (2.34) (2.654) (2.18) (1.970)
R2 = 0.61
GORt = 0.012 - 0.813Yrt + 0.765GER + 0.326GORt-1 â 0.134ECMt-1
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(2.260) (2.967) (5.980) (6.625) (0.716)
R2 = (0. 48)
The interpretation of the results begins with the inflation equation (equation 1). From the results presented above,
the principal determinants of inflation have been real output (as a supply variable), the growth of money supply,
inflation expectation and exchange rate. Indeed, the coefficient of lagged exchange rate is highly significant;
indicating that depreciation of exchange rate exerts upward pressure on inflation. The coefficient of the ECM
indicates that the feedback between inflation and money supply is 0.3.
From the income equation, it is interesting to note that income growth and real exchange rate were negatively
related, though the estimated coefficient was not statistically significant. This does not conform to what is normally
expected, i.e. real exchange depreciation associated with a decline in growth. This outcome is repeated in the next
equation (equation 3). One explanation is that slower income growth has put pressure on the exchange rate.
Nonetheless, it is useful to note from the exchange rate equation that real exchange rate, imports and income
growth have the correct signs on the respective coefficients. Thus, within the context of the model, the direct
relationship between the real exchange rate and real income growth is negative.
The result of government revenue equation is reported in equation 4. As the result shows, government revenue is an
important determinant of government expenditures an also responds significantly to growth in the economy,
represented by real GDP. The elasticity of government expenditure at 0.76 is quite high. A plausible explanation is
the Wagnerâs law of increasing state activities which posits that as the economy grows, government outlay tends to
grow.
Largely, the results are instructive. Some results confirm theoretical expectations while others do not. Nonetheless,
the use of lags, natural logarithms and error correction mechanism makes the model very dynamic and highly
appreciated.
6.1 Co-integration Test Results
The simultaneous equation results presented above provide some indication of the direct and indirect links between
exchange rate movements and growth. They expressed the short-run dynamics of the real exchange rate â real
income growth relationship. These results, and the basic conclusions of the paper, do not concern the question
whether the two variables are related in the long-run. This issue is tackled by running a Johansen cointegration
test based on VAR model of the real income and the real exchange rate. Since there is no direct theoretical linkage
between these two variables, the structure of the VAR model used has to be seen as a statistical relationship.
Estimating VAR models of real exchange rate and real income with different number of lags (from 1-4) and
comparing the value of the Akaike Information Criterion (AIC) statistics suggests that the optimal VAR structure
has one lag for each variable:
Yrt = c1 + Ξ11Yrt â1 + Ξ12 ext â1 + u1
ext = c2 + Ξ 21Yrt â1 + Ξ 22 ext â 2 + u2 ,
then the Johansen method for the VAR model with one lag is used to test for cointegration. The likelihood ratio test
finds no, cointegration in this case. His result is consistent with the earlier findings. The real exchange rate and the
real income are not significantly related. At most there is weak long-run relationship between the variables. These
results are consistent with earlier findings. The real exchange rate and the real income are not statistically related.
At most, there is a weak long-run relationship between the two variables.
7. Summary, Policy and Conclusion
This research has provided empirical estimates of the economic relationship between exchange rate, inflation,
government revenue and income growth in Nigeria. The objective was achieved through the use of a system of
equations which captured the inter-linkages between the above listed variables. The estimation strategy involved
the use of cointegration and a two stage least squares estimation technique.
The results of the estimation demonstrate that there is no statistically significant direct relationship between
inflation and exchange rate. They, however, are indirectly linked through several channels, including money and
output. The vector autoregression result shows that real exchange rate and real income are not significantly
cointegrated. In the long run, the exchange rate and income may not drift apart, but in the short run their
relationship is weak and indirect. Together, these results provide confirmation that there is no evidence of a strong
direct relationship between changes in the exchange rate and GDP growth. Rather, Nigeriaâs economic growth has
been directly affected by fiscal and monetary factors, particularly the growth of government revenue and
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