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ANALYSIS OF KEY DETERMINANTS OF EXCHANGE RATE STABILITY IN NIGERIA: An Autoregressive Distributed Lag (ARDL) and Nonlinear Autoregressive Distributed Lag (NARDL) Approach

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  • Ilu, Ahmad Ibraheem

Abstract

This study analytically examines the key determinants of exchange rate stability in Nigeria which encompass GDP, Interest rate, Inflation rate, and Oil prices. Using annual data for the years from 1986 to 2018. For the period under review numerous theories were discussed in this study. At the onset this study began its analysis by conducting descriptive statistics of the time series. The standard deviation indicates that exchange rate is more volatile than all the series followed by oil price. The skewedness statistic reveals that only GDP was found to be negatively skewed all other variables remains positively skewed. The Jarque- Bera statistic indicates that Exchange rate, inflation rate and oil price were found to be normally distributed. Ramsey test affirms a linear relationship between exchange rate and GDP, Interest rate, Inflation rate, and Oil prices while the BDS test repudiate the claim and asserts that the relationship is nonlinear. The study in a bid to ascertain the true value of parameters employs both linear and nonlinear time series models to guide its analysis and empirical investigations. In the linear component, stationary analysis is performed by using ADF, PP and KPSS unit root test and the ARDL bounds testing approach for a long run relationship between the variables while in the nonlinear integral the KSS nonlinear unit root test and the NARDL bounds test was upheld. Bounds test establishes across the two models that long run relationship exist between exchange rate and its determinants. The empirical findings indicate that in the ARDL model the short run estimates reveals negatively related and statistically insignificant Oil prices, statistically insignificant and negatively related inflation and interest rates and GDP was found to be positively related and statistically significant to exchange rate. In the NARDL cluster the short run estimates of the model reveals that past values of exchange rate have a negative influence on exchange rate. After decomposing oil price into positive and negative shocks, it was found that positive oil price shocks on exchange rate is negatively related and statistically significant while the negative oil price shocks were found to be the reverse scenario of positive shocks. In same vein GDP was found to be negatively related and statistically significant to exchange rate. The long run estimates are a bit consistent with the short run estimates. All other variables except positive oil price shocks were found to be positive and negatively related and statistically insignificant to the exchange rate. Furthermore, CUSUM and CUSUMSQ tests reveal both models are dynamically stable. Finally, the study recommends that the CBN and the Federal Government intensify efforts to revamp other sectors of the economy, embed them in a medium-long-term diversification plan to revive the agricultural sector, improve and efficient taxation, and solidify the economy as a service-oriented and financially developed economic clime.

Suggested Citation

  • Ilu, Ahmad Ibraheem, 2020. "ANALYSIS OF KEY DETERMINANTS OF EXCHANGE RATE STABILITY IN NIGERIA: An Autoregressive Distributed Lag (ARDL) and Nonlinear Autoregressive Distributed Lag (NARDL) Approach," MPRA Paper 121961, University Library of Munich, Germany, revised 25 Nov 2021.
    • Handle: RePEc:pra:mprapa:121961
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rate; Oil price; GDP; Interest rate; Inflation rate; ARDL and NARDL;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F0 - International Economics - - General
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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