Empirical Analysis of Exchange Rate Fluctuations and Gross Fixed Capital Formation in Nigeria

Abstract

This study investigated the effect of exchange rate Volatility on gross fixed capital formation. Mundell-Fleming Model is used as a theoretical framework for establishing relationship between relevant variables. The erratic fluctuation in exchange rates referred to as exchange rate volatility could be described as periods of domestic currency appreciation or depreciation. Exchange rate has considerable attention in terms of its influence on gross fixed capital formation. The study covered the period between 1980-2016 and Ordinary Least Square (OLS) techniques was used in estimating the relationship between the variables included in the specified regression model. The data was collected from Central Bank of Nigeria Statistical Bulletin and the World Bank Indicators for Nigeria. The major finding of this study shows that the Exchange rates (EXCHR) has a positive and significant linear relationship with gross fixed capital formation. This implies that a unit increase in naira gain against other currencies will result to 0.961 increases in GFCF. The result equally shows that the Degree of trade openness (TOP) has negative and significant relationship with Gross fixed capital formation .This implies that a unit increase in trade openness will result to a 1.613 unit decline in GFCF. The result of Inflation rate (INFL) has negative and significant relationship with gross fixed capital formation. This implies that a unit increase in inflation will result to a 0.558 unit decline in GFCF. It implies that Stringent trade measures should be adopted to checkmate inflation mostly the imported inflation through foreign trade. The study therefore recommends that monetary authorities should adopt measures that will strengthen the naira against other currencies. Also that Stringent trade measures should be adopted to protect local industries and reduce the depletion of our foreign reserves through excessive importation. This can be achieved through high tariffs, quotas and outright ban on some certain goods and services.