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DETERMINANTS OF EXCHANGE RATES IN NIGERIA: AN EMPIRICAL EVIDENCE USING THE PORTFOLIO BALANCE MODEL.
Abstract: Development of theories concerning determinants of exchange rate have been progressive with the Portfolio Balance model being the most intuitive addressing the criticisms of forerunner theories. A test of this model in Nigeria will contribute to the discussion on its relevance in nations’ economies. The study aimed to identify key determinants of exchange rates in Nigeria and ascertain the individual and joint effects of identified variables on the Nigerian exchange rate. Secondary data used were mainly sourced from Central Bank of Nigeria Statistical Bulletin and World Bank data base for the period 1982 to 2018. The Ordinary Least square method of regression estimation was adopted for analyses. The study’s model related changes in exchange rates to changes in reserves, domestic credit, foreign inflation,real income, domestic bond and foreign bond. None of the exogenous variables at 5% level of significance had significant effect on exchange rate,their joint effect was also not significant with an F statistics of 1.123, 21.2% of changes in exchange rate were accounted for by changes in the models variables. Domestic credit, foreign prices, reserves and real gross domestic product had negative coefficients at -0.126, -0.0824, -0.0826, -2.446 respectively, while foreign bond and domestic bond had positive coefficients at 0.0364 and 0.0900 respectively. Reserves, domestic credit and foreign bonds contradict theoretical expectation while foreign prices, real gross domestic product and local bonds were in agreement, furthermore, real gross domestic product had the highest effect on exchange rate. Monetary and fiscal policies that engenders investment in productive sectors should be implemented to bring about economic growth and a progressively appreciating exchange rate.
Key words: exchange rate, portfolio balance model, unit root test.