Macroeconomic Effect of Exchange Rate on Nigerian Economy

Resumo

This paper examines the macroeconomic effect of exchange rate on Nigeria economy for the period 1986 to 2020. Real effective exchange rates and economic growth are the variable of choice in the study.  In addition we computed the influence of money supply, government expenditure and inflation ratesn real gross domestic product to see the level of effect and employs the Autoregressive Distributed Lag approach for co-integration and error correction modeling in its analysis. The long-run model showed that real effective exchange rates, government expenditure and inflation rate have negative effect and statistically significant. Increase in these variables in the long run will impact negatively on the real gross domestic product. The long-run model further showed that money supply was statistically significant and have positive effect on the economy but significant and have negative effect at the short run. However in the short run real effective exchange rate and inflation rate have positive effect on exchange rate and invariably impact the economy positively while money supply was statistically significant and have negative effect at the short run. The error correction coefficient indicated that about 41 per cent of disequilibrium which occurred due to external shock in the previous year will be restored within the current year. This study therefore, recommends that, government should design and implement foreign exchange policies from the long run perspective and focus policies that would help diversify the economy.