Exchange Rate and Output in Nigeria (1986-2021)

Abstract

Exchange rate as a major macroeconomic indicator was examined alongside output within the period (1986-2021) in Nigeria. With the ever rising exchange rate, indications are that certain drivers of the economy that should help create some balance are lacking. Secondary data were sourced from the CBN statistical bulletin for the said period and subjected to statistical inferential analysis using the Vector Autoregression (VAR) model. The major objective was to ascertain the relationship between exchange rate and output following coefficients like the unit root test, difference-stationary process, lag length criteria, stability condition check, Engel and Granger test as well as autocorrelation test. Results indicate that exchange rate indirectly affects output as a unit increase in it results in a corresponding unit decrease in output where at lag 2, there is a positive relationship affecting output directly, where any unit increase in exchange rate at those lags leads to a unit increase in output. Exchange rate based on the other VAR variables may not be used in predicting output as prob. of the chi2 coefficient for all were less than 0.05 hence output is adversely affected as various macroeconomic variables are at risk. The study discourages heavy reliance on mono-economy (oil exports) while diversification in the areas of agriculture and manufacturing will help cushion the effects of rising exchange rates and inflation in the country.