THE IMPACT OF EXCHANGE RATE VARIATIONS ON AGGREGATE DEMAND IN NIGERIA (1979 -2008)

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                                               ABSTRACT

The study is a critical Evaluation of the impact of Exchange rate variation on Aggregate Demand in Nigeria. These study made use of the ordinary least square (OLS) regression technique in analyzing the impact of Exchange Rate Variation On Aggregate Demand in Nigeria. There are also other variables that determine the impact of Exchange Rate Variations on Aggregate Demand in Nigeria: 1979 -2008. Findings from the paper show that  all the variables included in the models contributes in explaining the role of exchange rate on aggregate demand in Nigeria. These massive contributions of these variables may strongly depend on the circumstances in Nigerian economic environment. The starting point in reclaiming and re-inventing project in Nigeria is to squarely admit that oil and the manner we have designed to utilize it have constituted a stumbling block in Nigeria’s progress. Accordingly, there is need to pay specific attention to the contest of action and the production relations in the various sections of the economy.

TABLE OF CONTENTS

Title Page =          =        =        =        =        =        =        =        =        i

Approval Page    =        =        =        =        =        =        =        =        ii

Dedication                     =        =        =        =        =        =        =        =        iii

Acknowledgement        =        =        =        =        =        =        =        iv

Abstract     =        =        =        =        =        =        =        =        =        v

Table of Content           =        =        =        =        =        =        =        vi

CHAPTER ONE

Introduction        =        =        =        =        =        =        =        =        1

1.1     Background of the Study       =        =        =        =        =        1

1.2     Statement of Problems           =        =        =        =        =        =        5

1.3     Objective of the Study  =        =        =        =        =        =        6

1.4     Statements of Hypothesis      =        =        =        =        =        7

1.5     Scope and Limitations of the Study          =        =        =        7

1.6     Significance of the Study        =        =        =        =        =        8

CHAPTER TWO: LITERATURE  REVIEW

2.1     Review of Theoretical Literature     =        =        =        =        10

2.2     Exchange ate Determination Models        =        =        =        11

2.2.1  Flexible Price Monetary Model       =        =        =        =        12

2.2.2  Sticky Price Monetary Model          =        =        =        =        13

2.2.3  Equilibrium Model and Liquidity Model                    =        =        14

2.2.4  Portfolio Balance Model        =        =        =        =        =        15

2.3     An Overview of Exchange Rate Regimes           =        =        16

2.3.1  The Gold Standard Regime    =        =        =        =        =        17

2.3.2  Flexible Exchange Rate Regime       =        =        =        =        18

2.3.3  The Crawling Peg Regime      =        =        =        =        =        19

2.3.4  The Managed Float Regime   =        =        =        =        =        20

2.3.5  The European Monetary System     =        =        =        =        21

2.4     An Evaluation of Exchange Rate Regimes in Nigeria =       22

2.4.1  The Pre – Sap ara          =        =        =        =        =        =        23

2.4.2  The Post –Sapara          =        =        =        =        =        =        24

2.5     Exchange Rate Determinants           =        =        =        =        26

2.5.1  Interest Rate        =        =        =        =        =        =        =        28

2.5.2  Transaction Motive       =        =        =        =        =        =        29

2.5.3  Volume of International Transaction       =        =        =        29

2.5.4  Political Instability       =        =        =        =        =        =        30

2.5.5  Policy Actions     =        =        =        =        =        =        =        31

2.6     Review of Empirical Literature       =        =        =        =        32

2.6.1  Empirical Literature on the Study using Foreign

Data set = = = = = = = = = = = = = = = = = = = = = ==  =      32

• Empirical Literature on the Study Using

Nigerian Data set = = = = = = == = = = = = = = = = = =       34

CHAPTER THREE: METHODOLOGY

• An Overview of the Model = = = = = = = = = = = = = = = 49
• Model Specification = = = = = = = = = == = = = = = = = = 50
• Unit Root Test = = = = = = = = = = = = = = = = = = = = = = 52
• Co Integration and Error Correction = = = = = = = = = = = 53

3.5.1  Economic Criteria = = = = = = = = = = = = = = = = = = = =   54

3.5.2  Statistical Criteria = = = = =  = = = = = =  = = = = = = = = = 54

3.5.3  Economics = = = = = = = = = = = = = = = = = = = = = = = = 54

CHAPTER FOUR:  PRESENTATION AND ANALYSIS OF RESULT

• ADF Test for Stationary = = = == = = = = = = =  = = ==  = 58
• CO Integration Test = = = = = = = = = = = = = = = = = = = 60
• Result from Modeling log of GDP by OLS = = = = = =  =  62
• Economic Interpretation = = = = = = = = = = = = = = = = =63
• Statistical Criteria = = = = = =  = = = = = = = = = = = = = = 69
  • Value = = = = = =  = = = = = = = = = = = = = = = = = = = 70
  • F- Test = = = = = = = = = = = = = = = = = = = = = = = = = = 70
• Evaluation based on econometric Criteria = = = = = = = = 71

4.6.2 Test for Hetrosedasticity   = = = = = = = = = = = = = = = = =71

4.6.3 Test for Multicollinearity = = = = = = = = = = = = = = = =  =73

4.6.4  Normality Test = = = = = = =  = = = = = = = = =  = == = = = 74

4.6.5  Test for Adequacy of the Model = = = = = = = = = = = =  = 75

4.7 Evaluation of the Hypothesis = = = = = = = = = = = =  = = = =76

 

CHAPTER FIVE

5.1 Summary  = = =  = = = = = = = = = = = = = = = = = = = = = = 78

5.2 Conclusion = = = = = =  = = = = = = = = = = = = = = = = = = = 79

5.3 Policy Implications = = = = = = = = = = = =  = = = = = = = = = 81

Bibliography = = = = = =  = = = = = = = = = = = = = = = = = = = = 85

 

 CHAPTER ONE

INTROUDCTION

• BACKGROUND OF THE STUDY

All over the world, policy makers have always been on the move to ensure that there is sustainable growth rate in the economies of the world.  As a result, a lot of economic factors have been brought to the fore to examine and investigate how they could be relevant in the achievement of their economic objectives.

In Nigeria, several government regimes have experimented on many economic factors (macroeconomic aggregates) to determine how economic growth could both be attained and sustained. Prior to the introduction of the structural adjustment programme (SAP) of 1986, that had exchange rate devaluation as  one of its policy measures, the economy of Nigeria ‘headed for the rocks’ and was highly distressed. This led to a decline in the country’s external reserves at a disturbing rate. The country’s debt stool was accumulated to an unfavorable level among others. In spite of this the naira exchange rate was overvalued leading to dexterous effect on the economy. It was opinioned  that exchange rate policy embarked upon by the Nigeria government, in August 1986,was to eliminate the observed distortions in the economy and bring about a sustainable growth in the economy.

Since exchange influences the interaction of household, business firms, private financial institutions and the central bank, it implies that it could also affect aggregate demand in Nigeria. Knowing fully well that exchange rate is a real phenomenon; variations in relative prices affect both economic performance and aggregate demand. Hence, exchange rate is a relative price between domestic currency. For instance, if the exchange rate between British Pounds sterling and Nigeria Naira is N250 per Pound, it follows that one pound exchange for N250 in the world foreign (currency) exchange market.

Exchange rates are of two broad categories. They include:

1. The fixed exchange rate and
2. The flexible exchange rate

The fixed exchange rates are pegged rates within narrow range of values by the central bank on trade of currencies while the flexible exchange also called FLOATING exchange rate is the rate that is determined by the forces of demand and supply.  Government has little direct control on the foreign exchange market that is flexible in nature.

Variation of exchange rates over the years are known to have ripple effects on some other macroeconomic variables like aggregate demand.  This fact underscores the pertinence of exchange rate to the economic well being of countries that open their doors to international trade (Kombe, 2004). Due to the impact exchange rate regimes have on economies of the world, economists consider it vital to verify how their countries exchange rate are determined since different regimes of exchange rate show different economic effects (Kujis, 1998).

Exchange rate determination varies from country to country. Part exchange rate regimes in Nigeria have been directed to control the use of foreign exchange at official determined rates. However, current policy options have shown an interest in market- determined exchange rate most current records show that the CBN has adapted an exchange rate regime that is neither pegged nor floating but a combination of both regimes called the MANAGED FLOAT exchange rate. This research work intends to look into the determinants of exchange rate in Nigeria and the impact exchange rate variations exert on aggregate demand in Nigeria.

• STATEMENT OF PROBLEM

Economic and political analysts have reached a consensus on what a good exchange rate is as well as how it could both be operated and sustained. In most economic papers and literature, the major issues have been the need for competitive exchange rate stability and structural adjustments in the promotion of this competitiveness. However, since exchange rate reveals competitiveness of exports from domestic economies to the outside world, the economic implication of its variations need to be ascertained so that good exchange rate policies that will be realistic in consonance with aggregate demand could be formulated, adopted and operated.