Dynamic Effects of Remittances on External Reserves in Nigeria: The Role of Inflation and Structural Breaks

Abstract

This study provides additional information about the drivers of external reserves in Nigeria. The result using Autoregressive Distributed Lag (ARDL) model estimation approach for the period 1980-2015 shows that remittances, among other macroeconomic variables, increased external reserves in the short run but weakens it in the long run. Remittances depletes external reserves through its effect on inflation rate and the nonsterilized intervention of the Central Bank. Furthermore, regime shift to relatively floating exchange rate causes remittances to increase reserves. From the foregoing, it is important for the authorities to continue operating relatively flexible exchange rate, and curtail excessive spending of remittances.
 
 Keywords: , , , , .
 JEL Classification: F31, F24, C22, F31

Determinants of foreign exchange reserve accumulation: empirical evidence from foreign exchange constrained economy

“…According to our results of autoregressive distributed Lag (ARDL) model, in the short run, inflation rate and exchange rate affect the foreign exchange reserve accumulation of Ethiopia negatively and significantly. Accordingly, our findings confirms the ideas of Million (2003), Geetha et al (2011) and Olubiyi et al (2018) that an increment in inflation rate leads to a reduction of the value of money, which in return causes the foreign exchange reserve to reduce as a result of an individual's asset holding reallocation. But, in the long run, inflation rate affects foreign exchange reserve positively and significantly which is in line with results of Drama (2016).…”

“…Olubiyi et al (2018) investigated the main drivers of external reserve in Nigeria using ARDL model estimation approach over the period of 1980–2015. The results shows that remittances has a negative effect on external reserves in the short run through its effect on inflation, implicitly indicating negative correlation between inflation and external reserve.…”

“…In the long run, inflation and short term external debt/GDP were found to affect foreign exchange reserves, whereas, in the short run, exchange rate was found to affect positively foreign exchange reserve of India. Olubiyi et al (2018) investigated the main drivers of external reserve in Nigeria using ARDL model estimation approach over the period of 1980-2015. The results shows that remittances has a negative effect on external reserves in the short run through its effect on inflation, implicitly indicating negative correlation between inflation and external reserve.…”

“…Having a significant marginal contribution toward solving the chronic reserve shortage in Ethiopia, as it is exclusively focused on what determines foreign exchange reserve both in the long run and short run, unlike other studies which focuses on the determination of exchange rate in Ethiopia, it has also a significant contribution to the literature of any developing country's foreign exchange reserve as there exists only few researches which are focused on the determinants of foreign exchange reserves like: Akamobi and Ugwunna (2017 ) , Dash et al (2017) and Olubiyi et al (2018). Besides, most of the researches undertaken signify only the existence of causal relationship between foreign exchange reserve and some macroeconomic variables, whereas, this paper provides us results specific to the magnitude and sign of the variable's effect on foreign exchange reserve over the short-run and long-run time periods.…”