Effect of Exchange Rate on Economic Growth: Further Evidence from Nigeria

Abstract

With increasing globalization and direct trade competition among countries, the role of exchange rate in both macroeconomic stability and the growth process has become more enhanced beyond what has been previously documented. Specifically, the real exchange rate has come to occupy the prime place among macroeconomic variables because of its influence on other 
variables. By directly affecting the competitiveness of domestic products, the real exchange is a key determinant of both exports and imports, while also affecting investment and capital accumulation. This influence of real exchange rate significantly dictates the trajectory of growth both in the short run and in the long run. The effect of real exchange rate on employment and inflation also transmits to affect the rapidity of growth. This paper investigates the effect of exchange rate on economic growth in Nigeria over the period of 198-2019 by providing further evidence given the mixed results that have emanated from previous studies. Using Error 
Correction Mechanism (ECM), the study finds that a unidirectional causality exists running from exchange rate to growth. It was also found that currency depreciation in Nigeria stimulates growth both in the short-run and in the long-run, though the relationship is 
statistically insignificant. Based on the findings, the study recommends policies to stabilize the exchange rate as a policy instrument for promoting economic growth in Nigeria.