IMPACT OF EXCHANGE RATE ON THE VOLUME OF IMPORT IN NIGERIA (1986-2020)
Need help with a related project topic or New topic? Send Us Your Topic
DOWNLOAD THE COMPLETE PROJECT MATERIAL
IMPACT OF EXCHANGE RATE ON THE VOLUME OF IMPORT IN NIGERIA (1986-2020)
Chapter two.
Literature Review
2.1 Definition of the Exchange Rate
The foreign exchange market is defined as an over-the-counter market in which numerous dealers (banks, corporations, and the government) are prepared to buy and sell deposits denominated in foreign currencies (Mishkin, 1997).
In this era of globalisation, interconnectedness among nations has enabled different countries to trade their foreign currency. Thus, Dornbusch and Giovannini (1990) believed that while global financial expansion provides greater opportunity for countries, it also imposes limits on all economic decisions such as exchange rate, monetary, and fiscal policies.
Financial conditions influence the impact of nominal exchange rate variations on growth stability, primarily through balance-sheet implications and foreign currency-denominated debt in developing and rising countries.
The net impact of exchange rate fluctuations will be determined by the relative relevance of competitiveness changes and costs resulting from balance sheet implications.
Financial market development influences economic performance by improving the allocation of productive resources and adjusting to shocks, which can result in more stable or unstable growth (Dornbusch and Giovannini, 1990).
The importance of exchange rates cannot be overstated; thus, Evan and Lyons (2005) believe that exchange rates are an important economic indicator that plays a strategic role in an economy, and that exchange rate movements have a wide range of effects on various aspects of the economy, including inflation and import-export performance
which in turn affects economic output. He believes that in the market, there are two major factors that interact with one another: supply and demand, and they produce an equilibrium, which is reflected in the price and quantity levels where the supply and demand curves intersect.
Different countries employ a variety of exchange rate regimes to defend their national currencies from fluctuations. The subject of which exchange rate regime a small open economy should adopt is ambiguous, as it is dependent on the objectives and focus of monetary authorities, as well as assumptions about the economy’s structural characteristics.
In this context, structural economic characteristics refer to the degree of openness, capital mobility, wage indexation, and the amount of economic growth and development.
The primary goal of a country’s monetary policy is to keep exchange rate volatility under control. Monetary policy development and implementation have an impact on macroeconomic variables (and thus macroeconomic stability) in any economy, developed or underdeveloped.
The crucial distinction is frequently the extent to which exchange rate swings affect domestic macroeconomic variables, particularly consumer prices, output (as measured by GDP), and private consumption. As a result, the choice of an exchange rate regime is in certain ways tied to meeting specific monetary authorities’ aims.
As Devereux (2001) argues, the ideal monetary policy rule in an open economy is one that stabilises non-traded goods price inflation, and a rigorous inflation targeting policy is far more desirable in an economy with little pass-through.
If the monetary authorities are concerned about consumer price inflation, then the flexible exchange rate regime has both costs and benefits. Furthermore, the same logic suggests that a policy of stringent inflation targeting is highly undesirable in an open economy, as it basically requires the exchange rate to be fixed. It stabilises inflation while causing significant output instability.
Need help with a related project topic or New topic? Send Us Your Topic