ABSTRACT

This study investigated the effects of macroeconomic variables on foreign exchange rate policy in Nigerian economy. The main objective of this study was to examine the impact of economic growth, interest rate, inflation rate and broad money supply on foreign exchange rate in Nigeria. In order to determine the short-run dynamics around the equilibrium relationship, the study estimated the model in the context of Error Correction Mechanism technique. From the estimated results, interest rate and inflation rate emerged as significant determinants of foreign exchange rate policy in Nigeria. However, economic growth and broad money supply emerged insignificant. Thus, the study showed in clear term that both interest rate and inflation rate are key drivers of the exchange rate policy in Nigeria. The study further, revealed that Nigeria’s economic growth which expectedly would have made a significant impact on her exchange rate policy failed to do so. Based on these findings the study recommends that the government should keep the inflation rate at low levels given that its changes over time dictates movements in her exchange rates. More so, the study recommends that interest rate should be so pegged in order not to discourage domestic borrowers or foreign investors. Finally, Nigeria’s economic growth should be made comprehensive so as to impact significantly on her exchange rate.