Comparative Analysis of the Impact of Fixed and Floating Exchange Rates on Economic Growth in Nigeria

Abstract

This paper analyses the impact of fixed and floating exchange rates on economic growth in Nigeria using annual data spanning (1960-2020). It sought to: examine the relationship between exchange rate and economic growth; and also to determine the nature and the direction of causality between exchange rate and economic growth in Nigeria. Employing the Ordinary Least Square (OLS) technique and the Granger Causality Test, the study revealed the existence of a positive but significant relationship between exchange rate and economic growth in Nigeria. The Chow-test result also shows that there was a structural break between exchange rate and economic growth in Nigeria within the period under review. This change in relationship can be attributed to the Structural Adjustment Programme (SAP) embarked upon by the Nigerian government in 1986. Furthermore, the results also indicate that there is no causality between exchange rate and economic growth in Nigeria. In view of the fact that exchange rate stability is absolutely imperative for macroeconomic stability, the paper recommended that government and monetary authorities should adopt monetary (money supply and interest rates) as well as fiscal policies (taxation and spending) that will not only ensure a convincing and stable exchange rate but will also serve to raise economic growth in Nigeria.