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Fiscal dominance and exchange rate stability in Nigeria

Author

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  • Taofeek Olusola Ayinde

    (Fountain University)

  • Abiodun S. Bankole

    (University of Ibadan)

Abstract

This study investigates fiscal dominance and exchange rate stability in Nigeria. The period of investigation spanned 1981q1–2018q4, and the Structural Vector Autoregression (SVAR) technique was employed to test the fiscal dominance hypothesis and further examine the shock transmission effects of fiscal deficit components such as budget deficit and public debt on exchange rate movement in Nigeria. As a robustness, Autoregressive Distributed Lag (ARDL) technique was employed to analyse the shock transmission effects of these components on the movement of exchange rate in Nigeria. More so, granger causality test was conducted to trace the direction of causality among the fiscal deficit components and the exchange rates. The results show that budget deficit and changes in exchange rates in Nigeria have bi-causal relationship, while public debt could not granger cause exchange rate movement in the country. The SVAR estimates suggests that exchange rate movement in Nigeria reacted only to the shock effects of financial openness and the ARDL results indicate that both public debt and budget deficit have destabilizing effects on exchange rates in Nigeria.

Suggested Citation

  • Taofeek Olusola Ayinde & Abiodun S. Bankole, 2021. "Fiscal dominance and exchange rate stability in Nigeria," Future Business Journal, Springer, vol. 7(1), pages 1-15, December.
    • Handle: RePEc:spr:futbus:v:7:y:2021:i:1:d:10.1186_s43093-021-00076-7
    DOI: 10.1186/s43093-021-00076-7
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    Cited by:

    1. Mohamed A. Eldepcy, 2022. "The Budget Deficit Financing Impact on the Real Exchange Rate in Egypt (1975-2020)," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 14(3), pages 1-84, February.

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    More about this item

    Keywords

    Budget deficit; Public debt; Exchange rate; Inflation; Financial openness;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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