Impact of Exchange Rate on Economic Growth: Evidence from Nigeria

Abstract

The effect of the exchange rate on GDP growth in Nigeria from 1985–2021, according to this analysis. The World Bank's World Development Indicator (WDI) and the Central Bank of Nigeria's (CBN) Statistical Bulletin were used as secondary sources of data. The real exchange rate served as a stand-in for the actual exchange rate, while real gross domestic product was used to gauge economic growth. We used the Augmented Dickey-Fuller unit root test to find out how integrated the series was. The bound test was used to test for cointegration. The bound test found that the exchange rate and economic growth are related in the long term. This research used the autoregressive distributed lag technique to estimate the short- and long-term effects of the exchange rate on GDP growth. The ARDL analysis shows that there is a weak negative correlation between the exchange rate and GDP growth. According to the research, trade openness has a small but favorable effect on GDP growth. Furthermore, the research indicated that foreign exchange reserves significantly and positively impacted economic development. There was also a negative and statistically significant relationship between interest rates and GDP growth. The analysis found that the exchange rate did not have a significant role in determining Nigeria's economic development. Given the importance of a stable and predictable exchange rate in boosting economic development, the research suggests that monetary authorities implement a policy primarily aimed at stabilizing exchange rates.