Foreign Exchange Rate Management and Macroeconomic Performance in Nigeria: Autoregressive Distributed Lag (ARDL) Bound Testing Approach

Abstract

This paper examined the impact of real exchange rate on economic performance in Nigeria for the period (1981-2021) using a modified and extended aggregate production model and Autoregressive Distributed Lag (ARDL) Bound Testing Approach for analysis. The results indicated that the real exchange rate had a positive and significant effect on economic performance in the long run and a negative but insignificant impact in the short run. As for the control variables, in the long-run capital stock, labour force and foreign direct investment had a positive and significant impact on economic performance, real interest rate and broad money supply exerted a positive but insignificant effect on economic performance, whereas inflation rate and trade openness displayed a negative but insignificant effect on economic performance. In the short-run, capital stock, inflation rate, foreign direct investment and broad money supply impacted positively on economic performance, while labour force, real interest rate, trade openness and government expenditure had a negative effect. It was recommended, among others, that government policies should be directed toward increasing productivity in Nigeria; and that Nigeria should refine a good chunk of crude oil locally, increase agricultural production and revive the manufacturing sector for increased manufacturing output to meet the country’s need for petroleum, agricultural and manufactured products.