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REAL EFFECTIVE EXCHANGE RATE MISALIGNMENT IN NIGERIA
ABSTRACT
The study analyzed the relationship between relevant macroeconomic variables and the real effective exchange rate (REER) in Nigeria based on the Behavioural Equilibrium Exchange Rate (BEER) approach. An Autoregressive Distributed Lag (ARDL) model was estimated to obtain the equilibrium REER while the resultant levels of misalignment were computed for the period 1990 – 2014. Model results indicated that terms of trade and degree of trade openness are significant determinants of the REER, implying that trade policies matter for Naira REER movements. The error correction model indicated that 3.3% of disequilibrium error is corrected within a quarter. On the average, the REER was found to be overvalued by 1.40 per cent during the study period. In view of the possible adverse consequences of REER misalignment on the economy, we recommend a regular assessment of the country’s trade policy with a view to ensuring that episodes of large and prolonged misalignments are avoided.
Keywords: Real Effective Exchange Rate, Exchange Rate Misalignment, Macroeconomic Variables