THE EFFECT OF EXCHANGE RATE DEPRECIATION ON INDUSTRIAL REAL GROSS DOMESTIC PRODUCT IN NIGERIA (1986-2013)

         ABSTRACT

 

Exchange rate variation has been identified as one of the salient factors that affect economic performance of a nation. Exchange rate plays a crucial role in international economic transactions because no nation is in isolation due to varying factor endowments. Hence, the effect of exchange rate variation on economic growth is subject to analysis in economics. Thus, the focus of this study is to empirically verify the effect of exchange rate depreciation on Nigeria economy. The effect of other indicators (interest rate and export) on manufacturing output will also be ascertained.

This study used secondary data collected from World Bank data base covering the period between 1986 and 2013. The Ordinary Least Square (OLS) is applied to explain the effect of exchange rate depreciation on industrial output performance in Nigeria.

The finding of the study reveals that there is a significant negative relation between exchange rate depreciation and the level of industrial output in Nigeria. In other words, a depreciation of exchange rate encourages export of industrial products.  The findings of the regression analysis reveal that exchange rate, real interest rate and export were found to be significant explanatory variables of the changes in industrial output in Nigeria.

This study therefore recommends that government should maintain a considerable low exchange rate so as to enhance export of industrial production to maintain a favourable terms of trade. 

Key Words: Exchange rate, depreciation, output, industry.

TABLE OF CONTENT

 

 

PREFACE.. i

TABLE OF CONTENT.. ii

LIST OF FIGURES. iv

LIST OF TABLES. v

LIST OF ABBREVIATIONS. vi

 

CHAPTER 1. 1

1.1.      Introduction. 1

1.2.       Purpose of the Study. 3

1.3.       Significance of the study. 3

1.4.       Research Questions. 4

1.5.       Research Hypotheses. 5

1.6.      Scope and Methodology of the Study. 5

1.7.       Structure of the Thesis. 6

 

CHAPTER 2. 7

2.1.       Introduction. 7

2.2.       Literature Review.. 8

2.3.      Exchange Rate and Industrial Production: (Theory and Evidence)11

2.4.       Conclusion. 13

 

CHAPTER 3. 14

3.1.      Introduction. 14

3.2.      Theories of Exchange Rate. 14

3.2.1.      The Purchasing Power Parity (PPP). 14

3.2.2.        Interest Rate Parity:. 15

3.2.3.        The Dornbusch Overshooting Model17

    3.2.4.        J-Curve effect of depreciation. 17

    3.2.5.         Marshall-Lerner condition. 19

3.3.       Exchange Rate Systems. 20

3.3.1.        Freely Fluctuating /Floating or Flexible Rate. 20

3.3.2.         Stable / Fixed Rates. 22

3.3.3.         Controlled exchange rate. 23

3.4.       Determinants of Exchange Rate. 24

 

CHAPTER 4. 26

     4.1.       Introduction………………………….…………………………………………………………………………..….26

4.2.        Industrial Production in Nigeria. 26

     4.3.         Exchange rate policies in Nigeria…………………………..…………….……………………………..28

4.3.1.        Exchange rate management in Nigeria before 1986. 30

4.3.2.        Exchange rate management after 1986. 30

4.4.         An overview of export promotion development in Nigeria. 32

4.5.        Current situation of Nigeria currency (Naira). 33

 

CHAPTER 5. 36

     5.1. Introduction………………………………………...…………………..………...36

5.2. Data and Model Specification. 36

5.4. Estimation Technique. 39

5.5. Presentation and interpretation of Regression Results. 40

CHAPTER 6. 43

6.1.Conclusion. 43

6.2.Recommendations and Suggestions. 44

 

REFERENCES. 45

APPENDIX 1……………………………………………………………………………………………………………………..….52

APPENDIX 2 …………………………………………………………………………………..53

APPENDIX 3……………………………………………...……………………………………54