Exchange Rate and Economic Growth in Nigeria: Error Correction Mechanism (ECM) Approach (1990-2016)

Abstract

The study examined Exchange Rate and Economic Growth in Nigeria for the period 1990-2016 using Ordinary Least Square (OLS) with Error Correction Mechanism (ECM). The Augmented Dickey-Fuller (ADF) test showed that the variables were found to be stationary at first difference I(1), while Johansen’s Cointegration result indicates five cointegrating equations. Granger causality test revealed that there is bi-directional causality between real GDP and exchange rate. It was also revealed that export causes exchange rate and exchange rate in return causes export. However, there is unidirectional causality between Real GDP and import with the causality flowing from RGDP to import. This implies that RGDP Granger causes import. The result showed that the coefficient of Error Correction Mechanism (ECM) is negative and significant. The ECM result shows that about 24 percent disequilibrium in the previous period is being corrected to restore equilibrium in the current period. Assessing the overall significance of the parameters, the study concluded that exchange rate has significant impact on Nigeria economic growth. Hence, the study recommended that government should embark on massive importation of capital goods in order to boost domestic production and discourage the importation of consumer goods and services that can be produced locally; government should encourage exchange rate appreciation through aggressive export strategy towards strengthening the external reserves; and government should invest in productive activities and infrastructural development, towards generating employment and controlling inflation.