Determinants of the Exchange Rate in Nigeria : Evidence from Ecm Model

This study investigated the determinants of the exchange rate in Nigeria via evidence from the Error Correction Model (ECM) over the period 1981 to 2020. The study focuses on two main objectives. The theoretical review highlights three main exchange rate determination approaches: The Purchasing Power Parity (PPP), the Monetary Methodology, and the Traditional Flow Model. The research methodology employs cointegration and error-correction methods to estimate the model using yearly data for the specified time frame. The econometric analysis comprises three stages, including unit root tests to ascertain stationarity, cointegration tests to identify long-term equilibrium relationships, and the ECM to represent short-term and long-term dynamics. The empirical results reveal the presence of significant determinants influencing the exchange rate in Nigeria. These determinants include economic openness, real output capacity, net capital flows, money supply growth, government expenditure, real interest rate, and inflation rate. The ECM model analysis indicates both short-term and long-term relationships between these determinants and the exchange rate. The study contributes to a deeper understanding of Nigeria's exchange rate dynamics and provides valuable guidance for policymakers in formulating effective monetary and fiscal policies to manage exchange rate fluctuations and foster economic development