IMPACT OF EXCHANGE RATE VARIATIONS ON AGGREGATE DEMANDS IN NIGERIA (1979 – 2008).
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IMPACT OF EXCHANGE RATE VARIATIONS ON AGGREGATE DEMANDS IN NIGERIA (1979 – 2008).
Chapter one
INTROUDCTION
1.1 Background of the Study
Policymakers around the world have long been working to guarantee that the world’s economies grow at a sustainable rate. As a result, several economic aspects have been brought to the forefront in order to study and investigate their relevance in achieving their economic goals.
In Nigeria, different government regimes have experimented with a variety of economic elements (macroeconomic aggregates) to understand how economic growth may be achieved and sustained.
Prior to the implementation of the structural adjustment programme (SAP) in 1986, which included exchange rate devaluation as one of its policy tools, Nigeria’s economy was ‘headed for the rocks’ and in severe difficulty.
This caused a rapid drop in the country’s external reserves. The country’s debt burden has grown to an unfavourable degree, among other things. Despite this, the naira currency rate was overvalued, having a detrimental effect on the economy.
It was believed that the Nigerian government’s exchange rate strategy, implemented in August 1986, was intended to minimise economic distortions and promote long-term growth.
Because exchange influences the interactions of households, businesses, private financial institutions, and the central bank, it is possible that it will have an impact on aggregate demand in Nigeria.
Knowing full well that the exchange rate is a real reality, fluctuations in relative prices have an impact on both economic performance and aggregate demand. As a result, the exchange rate represents the relative price of local currencies.
For example, if the conversion rate between British Pounds sterling and Nigerian Naira is N250 per Pound, one pound equals N250 in the global international (currency) exchange market.
Exchange rates fall into two groups. They include:
1. The fixed exchange rate,
2. Flexible exchange rates
Fixed exchange rates are pegged rates within a small range of values by the central bank on currency trade, whereas flexible exchange rates, also known as floating exchange rates, are decided by the forces of demand and supply. The government has limited direct influence over the very flexible foreign exchange market.
Changes in exchange rates over time have been shown to have an impact on other macroeconomic variables such as aggregate demand. This fact emphasises the importance of exchange rates to the economic well-being of countries that open up to international trade (Kombe, 2004).
Because of the impact exchange rate regimes have on global economies, economists believe it is critical to understand how their country’ exchange rates are decided, as different exchange rate regimes have varied economic implications.
Exchange rate determination differs by country. Part exchange rate regimes in Nigeria have been mandated to regulate the usage of foreign exchange at official rates.
However, current policy alternatives indicate an interest in market-determined exchange rates. Most recent records suggest that the CBN has adopted an exchange rate regime that is neither pegged nor floating
but rather a hybrid of the two known as the MANAGED FLOAT exchange rate. This study will look into the factors that influence exchange rates in Nigeria, as well as the impact that exchange rate fluctuations have on aggregate demand.
1.2Statement of Problem
Economic and political specialists have achieved an agreement on what constitutes a good exchange rate, as well as how it can be managed and sustained. Most economic papers and literature have emphasised the importance of competitive exchange rate stability and structural adjustments to promote this competitiveness.
However, because exchange rates reveal the competitiveness of exports from domestic economies to the rest of the world, the economic implications of their fluctuations must be determined so that good exchange rate policies that are realistic and in line with aggregate demand can be developed, adopted, and implemented.
As a result, the purpose of this study is to provide answers to the following questions in order to ensure market viability.
1) Are the exchange rate and aggregate demand variables stationary?
2) Do exchange rate fluctuations have any impact on aggregate demand?
3) How does the exchange rate effect aggregate demand in Nigeria?
1.3 Study Objectives
The particular objectives of this economic study are:
1. Determine the impact of exchange rate changes on aggregate demand.
2. Determine if there is a casual relationship between the exchange rate and aggregate demand.
1.4 Statement of Hypothesis
The following null hypotheses must be provided for the statistical significance and non-significance of data.
Hi: Exchange rate volatility has no effect on aggregate demand in Nigeria.
H2: In Nigeria, there is no causal link between exchange rates and aggregate demand.
1.5 Scope and Limitations of the Study
This study covered thirty years. This falls between 1976 and 2006. The purpose of this is to allow for observation for research purposes while compensating for the degree of freedom that may be costly.
1.6 Significance of the Study
This type of research is typically conducted directly, with variables extracted from their original sources. However, in this study, Philips’ (1986) guidelines, which say that they are statutory, shall be followed to ensure that the results of this work are reliable for future policy work.
As a result, the study’s findings will be extremely useful to a large number of people. For starters, scholars conducting research on the impact of currency rates in Nigeria will benefit from this study.
Second, policymakers who want to develop measures to address the effects of exchange rate volatility will find this research useful. Third, business enterprises, investors, and exporters who need to know when it is convenient to conduct business and when it is not may find this research effort useful in their economic decision-making processes.
Again, the Nigerian central bank, monetary authorities (financial ministries, and policymakers) would find this study effort critical in properly controlling exchange rate regimes in terms of government intervention in the economy through the central bank.
Finally, because of the revolutionary procedures performed in this research job, the end result of this study will contribute to knowledge, no matter how insignificantly, to Nigeria’s long-term economic prosperity.1.5 Scope and Limitations of the Study
This study covered thirty years. This falls between 1976 and 2006. The purpose of this is to allow for observation for research purposes while compensating for the degree of freedom that may be costly.
1.6 Significance of the Study
This type of research is typically conducted directly, with variables extracted from their original sources. However, in this study, Philips’ (1986) guidelines, which say that they are statutory, shall be followed to ensure that the results of this work are reliable for future policy work.
As a result, the study’s findings will be extremely useful to a large number of people. For starters, scholars conducting research on the impact of currency rates in Nigeria will benefit from this study. Second, policymakers who want to develop measures to address the effects of exchange rate volatility will find this research useful.
Third, business enterprises, investors, and exporters who need to know when it is convenient to conduct business and when it is not may find this research effort useful in their economic decision-making processes.
Again, the Nigerian central bank, monetary authorities (financial ministries, and policymakers) would find this study effort critical in properly controlling exchange rate regimes in terms of government intervention in the economy through the central bank.
Finally, because of the revolutionary procedures performed in this research job, the end result of this study will contribute to knowledge, no matter how insignificantly, to Nigeria’s long-term economic prosperity.
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