Determinants of Exchange Rate in Nigeria, 1970-2007: an Empirical Analysis (Report‪)‬

Abstract The paper investigates the determinants of exchange rate in Nigeria, by employing co-integration and error-correction techniques. The results indicate that improvement in productivity, investment-GDP ratio, and high inflation leads to exchange rate appreciation. On the other hand, higher degree of openness, increases in foreign exchange reserves, and interest rate differentials result in exchange rate depreciation. Overall, the findings confirm the Balassa-Samuelson hypothesis, which states that high productivity differentials lead to exchange rate appreciation. Thus, we propose policies that would encourage and facilitate improvement in productivity in all sectors of the economy, raise investment and foreign exchange reserves, reduce inflation, stabilize and further liberalize interest rate, and increase the openness of the economy.