Modelling the Causal Relationship among Remittances, Exchange Rate, and Monetary Policy in Nigeria

Abstract

This study examined the relationship and causality that exist between remittance inflows exchange rate and monetary aggregates - money supply, interest rate, and the domestic price level in Nigeria. The Johansen co-integration and the Granger causality techniques were employed. The Johansen co-integration test indicated that long run relationship exist among the variables. The Granger causality test results revealed a unidirectional causality running from money supply (LM2) to remittances (LREM) only at lag one and not in the reverse. In other lags, there was no evidence of causality between the duos. The results also showed that, consistently from lag one to lag five, causality run from exchange rate (LEXR) to LREM and not in reverse direction. Unidirectional causality run from interest rate (INT) to LREM, occurring from lag one to lag four. There was no evidence of causality in any direction between inflation rate (INF) and LREM within these lags. We also found that causality run from exchange rate (LEXR) to money supply (LM2) only at lags one and four and not in the reverse order.

Keywords: Remittance Inflows, Exchange Rate, and Monetary Policy.