Exchange rate and Industrial output within an SVAR framework: Evidence from Nigeria

Abstract

The Nigerian exchange rate has gone through several reforms. Thus, this study seeks to also establish, the manner with which variations in the exchange rates influence industrial production.It focus essentially on the impact of a shock to the exchange rate on industrial production in Nigeria. The study employs the use of the SVAR model with the assumption of Cholesky decomposition as an identification scheme for four variables in the following order: exchange rate, industrial output, broad money supply, and price level.It is found that for the period under study, industrial output plays no role in explaining the fluctuations in the real exchange rate in the short run. Similarly, results show that shock to real exchange rate plays no role in explaining the fluctuations in industrial output in the short run. However by the end of a second-year period, industrial output takes 23% of the fluctuations in the real exchange rate and real exchange rate explains about 17% of the fluctuation in industrial output. As an extension, analyses show that shock to inflation and money supply have minimal influence on industrial output.It is recommended that a concentration on real factors such as savings rate, infrastructural facilities, political stability, and security can provide relatively more influence on industrial production in Nigeria.This study has contributed to knowledge through the analysis of data to identify the impact of a shock to the exchange rate on industrial production in Nigeria.