BEHAVIOUR OF REAL EXCHANGE RATE AND FISCAL VARIABLES IN NIGERIA: AN ECONOMETRIC EXPLORATION

Kalu, Christopher¹, Amaka Metu¹ and Athan Nwachukwu²

¹Nnamdi Azikiwe University, Awka

²Federal Polytechnic Nekede, Oweri

E-mail: ziontrainn2003@yahoo.com

ABSTRACT

This study analyses the behavior of the bilateral real exchange rate and fiscal variables in Nigeria from the period 1970 – 2012 to address the linkage between these variables. The analytical technique employed is that of the Ordinary Least Square and Instrumental Variable (OLS, IV) method using the Hildreth – Lu grid search method and by expanding the previously given list of the Instrumental Variable to include the once-lagged values and the relevant variables in establishing the relationship. The empirical result suggests that: Real devaluation improves fiscal balance and that budget deficit influences the behavior of real exchange rate. Again the increase in income associated with exchange rate depreciation increases import and depreciates the balance of payments. Hence the recommendation that the monetary authorities should adopt anti-inflationary measures (Fiscal and monetary restraints) to achieve real depreciation, and the production of import competing goods be encouraged so that a large proportion of increase in income arising from exchange rate depreciation is not spent on imports.

Keywords: Real Exchange rate, Fiscal expenditure, fiscal revenue, Nigeria.