Exchange Rate Regimes and Economic Growth in Nigeria

Abstract

In view of the fact that economic theory does not clearly identify which kind of exchange rate regime would be more likely to promote economic growth, this paper seeks to determine the differential impact of exchange rate policy on economic growth in Nigeria under a fixed and a flexible exchange rate regimes from 1973 to 2017 using the dummy variable regression model. The annual time series data of the variables that are used in the estimation of the model are obtained from The World Bank: The World Tables, 1974 and World Bank World Development Indicators. The differential intercept is positive but statistically insignificant and differential slope coefficient is positive and statistically significant, strongly suggesting that the exchange rate-economic growth regressions for the fixed and flexible exchange rate regimes are different. The slope coefficient for a flexible exchange rate regime is greater than the slope coefficient for a fixed exchange rate regime by 7.8472 units. The calculated F-statistic is greater than the tabulated F-statistic at 5 percent level of significance and at 6 and 38 degrees of freedom. This implies that there is an evidence of structural instability. The regression coefficient of exchange rate is positive and statistically significant. The result shows that the switch from a fixed exchange rate regime to a flexible exchange rate regime leads to an increase in exchange rate and the depreciation of exchange rate has significant positive impact on economic growth in Nigeria. A flexible exchange rate regime would promote economic growth more than a fixed exchange rate regime. We recommend the sustainability of a flexible exchange rate regime that has been in operation since 1986 in order to increase economic growth in Nigeria.

Keywords: Exchange rate regimes, Economic growth, Dummy variable regression model, Secondary data, Nigeria

DOI: 10.7176/JESD/10-18-19

Publication date:September 30^th 2019