Impact of the Exchange Rate on Economic Growth in Nigeria

Abstract

This paper examines the impact of the exchange rate on economic growth in Nigeria. In particular, it investigates both the long-run impact, the short-run dynamics, and the long-run relationship of the underlined variables of the impact of the exchange rate on economic growth in Nigeria using the autoregressive distributed lag model (ARDL) and an error correction model (ECM). The results show that there is a positive relationship between the exchange rate and economic growth in the long run and a positive relationship between trade openness and economic growth in the long run. Foreign direct investment net inflows also have a positive relationship with economic growth. More specifically, the results indicate that a 1 percent rise in the exchange rate in the long run leads to a 0.006 percent rise in economic growth rates, and a 1 percent rise in trade openness and foreign direct investment net inflows in the long run increases economic growth by 0.12 and 2.27 percent, respectively. Given the positive impact of exchange rates on RGDP, maintaining a stable exchange rate environment is crucial, and policymakers should aim to implement measures that promote stability while also considering policies that enhance competitiveness. This may involve monitoring and managing currency fluctuations to ensure they remain favorable for both domestic industries and export activities.