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THE DETERMINANTS OF REAL EXCHANGE RATE IN NIGERIA
Abstract
In this paper, an attempt is made to investigate the determinants of the real exchange rate in Nigeria. The objective of the study has been to present a dynamic model of real exchange rate determination and empirically test the implications of changes in possible determinants of the real exchange in Nigeria. With data covering 1970-2010, the parsimonious ECM result shows amongst others that the ratio of government spending to GDP, terms of trade and technological progress are not important determinants of the real effective exchange rate in Nigeria. The result showed that capital flow, price level and nominal effective exchange rate are important determinants of the real effective exchange rate in Nigeria. The paper suggests that the Dutch Disease syndrome holds in Nigeria. The Johansen cointegration test suggests a long relationship among the variables. It is thus recommended amongst others that policies have to be put in place to stabilize the problem of inflation.
Keywords: Real Exchange Rate, cointegration, parsimonious Error Correction model, Dutch disease 1.