Currency Devaluation and Macroeconomic Variables Responses in Nigeria: A Vector Error Correction Model Approach: 1986-2016

Abstract

Exchange rate devaluation is said to have ripple effects on macroeconomic variables. Hence, this study empirically examined how macroeconomic variables responded to currency devaluation in Nigeria: 1986-2016. In other to achieve our aim, the Augmented Dickey Fuller (ADF) and Philip Peron (PP) stationarity tests were employed to examine the stationarity properties of the variables stated in the model, while Johansen Co-integration test was employed to see if there is a long run relationship among the variables in the model. It was then revealed that, all the variables were integrated of the same order and were stationary at first difference I(1), while the result of the co-integration test revealed that, there is long run relationship among the variables. These therefore necessitates the use of Vector Error Correction Model (VECM) model and Impulse Response in the analysis. The result revealed that, exchange rate devaluation have a positive and significant impact on macroeconomic variables tested, including economic growth in Nigeria. While the impulse response result showed that, real gross domestic product (RGDP), one period lag of exchange rate devaluation, money supply, external reserve, interest rate, balance of payment all responded positively to shocks generated by exchange rate devaluation in the economy; while inflation, trade openness and non-oil export responded negatively. In the same vein, while exchange rate devaluation revealed progressive and noteworthy impact on balance of payment, its impact on non-oil export were found to be negative which is in tandem with the findings from previous studies. It is equally important to state that, even though there are diverse benefits from currency devaluation, but these benefits can only be harnessed when there is improvement in the production of goods and services for both domestic consumption and export purposes.