A VAR Approach to Exchange Rate and Economic Growth in Nigeria

Abstract

Exchange rate is very pivotal in its role in the economy of any nation especially as a result of globalization. This paper seeks to model the Nigerian economy proxied by the log of Gross Domestic Product (LGDP) and its relationship with other variables in the economy. The variables used are NGN/USD exchange rate (NAIRA), log of oil revenue (LOILREV), log of government expenditure. We estimated the model using the Vector Autoregressive (VAR) model. We tested the presence or otherwise of causality among the variables using the method of Granger. The result reveals that the optimal lag for the model was 1. The exchange rate was found to Granger cause the economy (LGDP), LOILREV (Oil Revenue) and LGEXP (Government expenditure). We also discovered that the dynamics of NAIRA was not fully captured by the variables used. We also pointed out the shock persistence of NAIRA in time.

Real Exchange Rate and Economic Growth: An Empirical Assessment for Vietnam

“…Meanwhile, the existence of TRADE and GOVEXP do not play important roles because of their relative insignificance in the estimation model. These results seem to be consistent with the outcomes of other studies by Razzaque et al (2017) and Okonkwo et al (2017). The Granger Causality test in a VaR environment is conducted to examine whether there is a causality link between these variables.…”

“…In another recent study in Nigeria, Okonkwo et al (2017) applied 37 observations to a sample from 1970 to 2010 to test the existence of causality among the variables, including GDP, New Gold Inc (NGD)/United States Dollar (USD) exchange rate, government expenses, and oil revenue. The variance decomposition in the VaR model indicates that the exchange rate makes the greatest contribution to economic performance compared to other variables.…”

A Var Approach to Exchange Rate and Consumer Price Index Shocks on Economic Growth in Nigeria

“…Exchange rate is therefore referring to as the price at which one country's currency is exchanged for that of another country. The status of a country's economic wellbeing is reflected by the real exchange rate (Okonkwo et al, 2017). In general, if a country experiences an increase in its domestic income, it is likely that its currency will decrease in value.…”