Determinants of Exchange Rate Instability in Nigeria

This paper investigates the determinants of exchange rate instability in Nigeria from 1980 through 2013. Without exchange rate the exchange of goods and services among trading partners will be faced with a lot of problems, which may virtually narrow it down to trade by barter. This exchange also is used to determine the level of output growth of the country. Hence, the rate at which exchange fluctuates calls for a lot of attention. However, with already existing exchange rate policies, a constant exchange rate has not been attained. Having obtained the instability of exchange rate through the various econometrics techniques, the regression test and unit root test was used to examine the various determinants of exchange rate instability in Nigeria, while the co-integration analysis reveals the presence of a long term equilibrium relationship between the various variables and its various determinants and also error correction model (ECM). My empirical analysis further shows that exchange rate EXR, external reserve EXTRESV, interest rate INTR and inflation INFL are among the major variables that influence real gross domestic RGDP during this period. This study recommends that the central monetary authority should institute policies that will minimize the magnitude of exchange rate instability while the federal government exercises control of viable macroeconomic variables which have direct influence on exchange rate fluctuation.