An Analysis of Foreign Exchange Reserve Holdings and Macroeconomic Stability in Nigeria.
ABSTRACT
This study stems the depletion of Nigeria’s Reserves in recent times and the possible implications of this fluctuation of the Foreign Exchange Reserves on the macroeconomic stability of Nigeria in tandem with factors like holding of Reserves in excess and the desirability or otherwise of holding Reserves as embedded in the nation’s Reserve Management Strategy.
The study used quarterly data ranging from the first quarter of 1981 to the first quarter of 2015.
A Reserve demand function was developed using a simultaneous equation model to provide a theoretic cover of the interdependence between Real GDP and Foreign Exchange Reserves while VAR Models were used to estimate the implications of Reserves on some macroeconomic indicators which included Inflation Rate, Exchange Rate and Investment.
Cointegration tests reveal that there was no long-run relationship amongst the variables in their respective models. It was found that the opportunity cost of holding Reserves though negatively affecting Reserve holdings was not significant, while other factors like the Capital and Current Account Vulnerability.
Trade Openness, lagged value of Nominal Exchange Rate all significantly determine Foreign Exchange Reserves in Nigeria.
The IMF condition and Guidotti-Greenspan condition for Reserves Adequacy were significant determinants of Reserve holdings.
Inflation in Nigeria was found to respond negatively to fluctuations from the Reserves while Exchange Rate and Investment were found to positively respond to shocks from the Reserves. Conclusions drawn were that the decision to hold Reserves is not motivated by the return on Reserves.
TABLE OF CONTENTS
Title Page ii
Approval Page iii
Certification Page iv
Dedication v
Acknowledgement vi
Appendices x
List of Tables xi
List of Figures xii
Abstract xiii
CHAPTER ONE: INTRODUCTION
- Background of the Study 1
- Statement of the Problem 3
- Research Questions 5
- Objectives of the Study 5
- Research Hypotheses 6
- Significance of the Study 6
- Scope of the Study 6
- Structure of the Study 7
CHAPTER TWO: REVIEW OF RELATED LITERATURE
- Conceptual Framework 8
- Macroeconomic Stability 9
- Theoretical Review 14
- Theories of Trade 15
- The Theory of the Demand for Money 17
- Theories of Reserves Optimality/Adequacy 19
- Theories of Reserves Management 22
- The Concept of Liquidity Effect 23
- Empirical Review 24
- Limitations to Previous Studies 28
CHAPTER THREE: METHODOLOGY
- Theoretical Framework 30
- Model Specification 33
- Pre-Estimation Tests 37
- Test for Identification of Equations 38
- Test for Simultaneity 39
- Test for Structural Break 40
- Test for Stationarity 41
- Test for Cointegration 42
- Causality Test 43
- Impulse-Response Function (IRF) 43
- Post-Estimation Tests 43
- Test for Identification 44
- Test for Weak Identification 44
- Test Verifying the Orthogonality Condition 45
- Test for Redundancy of Instruments 45
- Diagnostic Tests 45
- The Lagrange Multiplier (LM) Autocorrelation Test 46
3.6.1 Stability Diagnostics 46
- Justification of the Model 46
- Sources of Data 47
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
- Data Presentation 48
- Test for Structural Break 48
- Test for Stationarity 50
- Test for Cointegration 51
- Test for Simultaneity 55
- Estimation and Analysis of Results (Model 1) 55
- Post-Estimation Tests (Model 1) 56
- Estimation and Analysis of Results (Model 2) 58
- Lag Length Selection and Estimation (Model 2) 59
- Granger Causality Test (Model 2) 60
- Impulse-Response Function (Model 2) 60
- Diagnostic Tests (Model 2) 61
- Estimation and Analysis of Results (Model 3) 63
- Lag Length Selection and Estimation (Model 3) 63
- Granger Causality Test (Model 3) 64
- Impulse-Response Function (Model 3) 65
- Diagnostic Tests (Model 3) 66
- Estimation and Analysis of Results (Model 4) 67
- Lag Length Selection and Estimation (Model 4) 68
- Granger Causality Test (Model 4) 68
- Impulse-Response Function (Model 4) 69
- Diagnostic Tests (Model 4) 70
- Hypotheses Testing 71
- Research Hypothesis 1 72
- Research Hypothesis 2 72
- Research Hypothesis 3 72
- Research Hypothesis 4 73
- Research Hypothesis 5 73
CHAPTER FIVE: SUMMARY OF FINDINGS, POLICY IMPLICATIONS AND RECOMMENDATIONS
- Summary of Findings 74
- Policy Implications of Findings 76
- Policy Recommendations 79
REFERENCES 81
INTRODUCTION
Nigeria, like many other countries hold Foreign Exchange Reserve at what is perceived a favourable level, the reason for this is not farfetched. Foreign Exchange Reserve plays a critical role in the stability of any given economy on the whole and this is a major reason why its dynamics creates worrisome riddles to policy makers.
Foreign Exchange Reserve otherwise called External Reserve, as defined by the International Monetary Fund (IMF, 1993),
Central Bank of Nigeria (CBN, 2007a), “consists of official public sector foreign assets that are readily available to, and controlled by the monetary authorities for direct financing of payment imbalances, through intervention in the exchange markets to affect the currency exchange rate and or for other purposes”.
This definition as implied by the IMF explains that the quantum of Foreign Exchange Reserve held in any given economy depends to an extent on the monetary policy implementation of the said economy.
According to Mbeng, Cédric and Duru (2013:1), “they are the result of the operations of the economic policy. They constitute a key indicator that estimates a country’s external economic relationships in terms of exports and capital inflow.
In other words, they reflect the country’s international trade surpluses, foreign debt balance and foreign direct investment balance”. Nigeria operated the Bretton Woods exchange rate system as did most other world economies, and switched over to the free-floating exchange rate when in 1973 (Obadan; 2009).
The United States single-handedly terminated convertibility of the US dollar to gold, automatically bringing the Bretton Woods system to an end and making the dollar a fiat currency.
REFERENCES
Abdullateef, U. and Waheed I. (2010). External Reserve Holdings in Nigeria: Implications for Investment, Inflation and Exchange Rate. Journal of Economics and International Finance, 2(9), 183-189
Abel, A. B., Bernanke, B. S., and Croushore, D. D. (2011). Macroeconomics (7th ed.). Boston: Addison Wesley.
Adam, E., and Léonce, N. (2007). Reserve Accumulation in African Countries: Sources, Motivation and Effects. University of Massachusette Working Paper, 12.
Afrin, S., Sarder, W., & Nabi, G. (2014). The Demand for International Reserves of Bangladesh. Bangladesh Bank Working Paper Series, 1402, 1-24.
Ajibola, I. O., Udoette, U. S., Muhammad, O., and Rabia, M. (2015, June). Nonlinear Adjustments between Exchange Rates and External Reserves in Nigeria; A Threshold Co-integration Analysis. CBN Journal of Applied Statistics, 6(1).
Andrews, D. W. (1993). Tests for Parameter Instability and Structural Change with Unknown Change Point. Econometrica, 59, 817-858.
StudentsandScholarship Team.
Be the first to comment