Effects of Shocks to Money Supply on Exchnage Rate in Nigeria: A Vector Error Correction Approach
Resumo
This paper examines the effects of shocks to money supply on exchange rates in Nigeria for the period 1986 – 2013, by applying the vector error correction approach. The choice of this period is to enable us focus strictly on the post SAP period when exchange rate management was conducted under the flexible exchange rate regime. The central bank’s balance sheet identity was used to link the processes that generate both the money supply and exchnage rate. The VEC result suggests that money supply is found to have immediate depreciating effect on the exchange rate and that exchange rate depreciation influences money supply more in the long run. It is recommended that the Central Bank of Nigeria should avoid foreign exchange intervention when movements in exchange rates are non-transient.
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