The Dynamics of Exchange Rate Movements and Economic Growth in Nigeria: Does the Mundell–Fleming Model Stand?

Abstract

The purpose of this study is to examine if exchange rate fluctuations have an impact on Nigeria’s economic performance using annual time series spanning from 1986 to 2020. The Generalised Autoregressive Conditional Heteroscedasticity (GARC) model was used as the study’s analytical technique. The result shows that in the long-run, exchange rate depreciation, inflation and the monetary policy rate have a significant long-term impact on the nation’s economic performance. By implication, the Naira/USD exchange rate fluctuation affects the economy negatively. Therefore, an appreciation in the value of the Naira relative to the USD will enhance Nigeria’s economic performance and vice versa. The net effect of this finding is that a persistent exchange rate fluctuation is detrimental to Nigeria’s economic stability and overall performance. With this finding, this study suggests the intervention of the monetary authority to reduce the level of fluctuation and ensure short-term and long-term stability in the exchange rate system. From the fiscal policy perspective, the government should consider trade interdependence and flexibility of production factors when formulating exchange rate policies.

Keywords:Exchange Rate Fluctuations, Monetary Policy Rate, Inflation Rate, Economic Growth, Mundell-Fleming Model, & Nigeria

JEL: C1, F4, F31

DOI: 10.7176/JESD/14-10-06

Publication date:May 31^st 2023