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THE IMPACT OF EXCHANGE RATE VARIATIONS ON
AGGREGATE DEMANDS IN NIGERIA (1979 – 2008)
ABSTRACT
The study is
a critical Evaluation of the impact of Exchange rate variation on Aggregate
Demand in Nigeria. These study made use of the ordinary least square (OLS)
regression technique in analyzing the impact of Exchange Rate Variation On
Aggregate Demand in Nigeria. There are also other variables that determine the
impact of Exchange Rate Variations on Aggregate Demand in Nigeria: 1979 -2008.
Findings from the paper show that all
the variables included in the models contributes in explaining the role of
exchange rate on aggregate demand in Nigeria. These massive contributions of
these variables may strongly depend on the circumstances in Nigerian economic
environment. The starting point in reclaiming and re-inventing project in
Nigeria is to squarely admit that oil and the manner we have designed to
utilize it have constituted a stumbling block in Nigeria’s progress.
Accordingly, there is need to pay specific attention to the contest of action
and the production relations in the various sections of the economy.
CHAPTER ONE
INTROUDCTION
1.1BACKGROUND
OF THE STUDY
All over the
world, policy makers have always been on the move to ensure that there is
sustainable growth rate in the economies of the world. As a result, a lot of economic factors have
been brought to the fore to examine and investigate how they could be relevant
in the achievement of their economic objectives.
In Nigeria,
several government regimes have experimented on many economic factors
(macroeconomic aggregates) to determine how economic growth could both be
attained and sustained. Prior to the introduction of the structural adjustment
programme (SAP) of 1986, that had exchange rate devaluation as one of its policy measures, the economy of
Nigeria ‘headed for the rocks’ and was highly distressed. This led to a decline
in the country’s external reserves at a disturbing rate. The country’s debt
stool was accumulated to an unfavorable level among others. In spite of this
the naira exchange rate was overvalued leading to dexterous effect on the
economy. It was opinioned that exchange
rate policy embarked upon by the Nigeria government, in August 1986,was to
eliminate the observed distortions in the economy and bring about a sustainable
growth in the economy.
Since exchange influences the interaction of
household, business firms, private financial institutions and the central bank,
it implies that it could also affect aggregate demand in Nigeria. Knowing fully
well that exchange rate is a real phenomenon; variations in relative prices
affect both economic performance and aggregate demand. Hence, exchange rate is
a relative price between domestic currency. For instance, if the exchange rate
between British Pounds sterling and Nigeria Naira is N250 per Pound, it follows
that one pound exchange for N250 in the world foreign (currency) exchange
market.
Exchange
rates are of two broad categories. They include:
1. The fixed exchange rate and
2. The flexible exchange rate
The fixed exchange rates are pegged
rates within narrow range of values by the central bank on trade of currencies
while the flexible exchange also calledFLOATING exchange rate is the rate that
is determined by the forces of demand and supply. Government has little direct control on the
foreign exchange market that is flexible in nature.
Variation of exchange rates over the
years are known to have ripple effects on some other macroeconomic variables
like aggregate demand. This fact
underscores the pertinence of exchange rate to the economic well being of
countries that open their doors to international trade (Kombe, 2004). Due to
the impact exchange rate regimes have on economies of the world, economists
consider it vital to verify how their countries exchange rate are determined
since different regimes of exchange rate show different economic effects (Kujis,
1998).
Exchange rate determination varies
from country to country. Part exchange rate regimes in Nigeria have been
directed to control the use of foreign exchange at official determined rates.
However, current policy options have shown an interest in market- determined
exchange rate most current records show that the CBN has adapted an exchange
rate regime that is neither pegged nor floating but a combination of both
regimes called the MANAGED FLOAT exchange rate. This research work intends to look
into the determinants of exchange rate in Nigeria and the impact exchange rate
variations exert on aggregate demand in Nigeria.
1.2STATEMENT
OF PROBLEM
Economic and
political analysts have reached a consensus on what a good exchange rate is as
well as how it could both be operated and sustained. In most economic papers
and literature, the major issues have been the need for competitive exchange
rate stability and structural adjustments in the promotion of this
competitiveness. However, since exchange rate reveals competitiveness of
exports from domestic economies to the outside world, the economic implication
of its variations need to be ascertained so that good exchange rate policies
that will be realistic in consonance with aggregate demand could be formulated,
adopted and operated.
Therefore,
this study aims at providing answers to the questions stated below in order to
ensure that viability reigns in the market.
1) Are
exchange rate and aggregate demand variable stationary?
2) Does
exchange rate variations have affect any impact on aggregate demand?
3) To what
extent does exchange rate affect aggregate demand in Nigeria?
1.3OBJECTIVES
OF THE STUDY
The specific
objective of this economic study are:
1. To ascertain the impact of exchange rate
variations on aggregate demand.
2. To estimate if there exists any casual
relationship between exchange rate and aggregate demand.
1.4STATEMENT
OF HYPOTHESIS
The
following null hypothesis are to be stated for the statistical significance and
non – significance of data.
Hi: Exchange rate instability has no impact on
aggregate demand in Nigeria.
H2: There is no casual relationship between
exchange rate and aggregate demand in Nigeria.
1.5 SCOPE AND LIMITATIONS OF THE STUDY
The length of period within which
this study covered is thirty years. This
falls between the periods of 1976 and 2006.
This essence of this is to enable the observation for the research work
compensate for degree of freedom that could be cost.
1.6 SIGNIFICANCE OF THE STUDY
Research work of this kind is usually
treated directly with the variables lifted from their sources. However, in this study, the directives of
Philips (1986), which states that they are statutory, will be adopted to be
assured that the result from this work is reliable for other policy works.
Thus, the findings of this study will
be of great importance to a lot of people. Firstly, researchers carrying out
research work on the influence of exchange rate in Nigeria would find this
research work helpful. Secondly, policy makers who wish to formulate policies
on the effects of exchange rate instability would find this research work
handy. Thirdly, business firms and investors as well as exporters who need to
know when it is convenient to operate in business and when it is not, would
find this research work a present- help in their periods of economic decision-
making. Again, the central bank of Nigeria, the monetary authorities (financial
ministries and policy formulators would find this research work vital in
regulating exchange rate regimes appropriately in terms of intervention of the
government into the economic system through the central bank. Finally, due to revolutionary steps taken in
this research work, the end product of this study would add to knowledge, no
matter how infinitesimal, as a contribution for a sustainable economic growth
in Nigeria.
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