Examining the Behavior of Exchange rate in Nigeria: An Application of the Pinto Model

Abstract

A non-traditional model of exchange rate behavior, namely, the Pinto model is examined within the confines of a reduced-form linear stochastic model with respect to the Nigerian naira and the U.S. dollar from 1980-2012. This Pinto model hypothesizes a parallel rate that is assumed to reflect market fundamentals and influenced by the following exogenous variables: an inflation rate, broad money supply, terms of trade, the official naira dollar exchange rate as a policy variable, and the level of fiscal deficits. Applying the unit root tests on the determinants suggest that the time series data might be spurious and thus necessitate co-integration application. The results indicate a long run co-integrating vector between the naira-dollar parallel exchange rate and its aforementioned determinants.

Keywords: Parallel Exchange Rate, Dutch-disease Syndrome, Non-traditional, Co-integration