IJARP SJIF(2018): 4.908

International Journal of Advanced Research and Publications!

Interest Rate And Exchange Rate In An Oil Dependent Economy: The Case Of Nigeria

Volume 4 - Issue 5, May 2020 Edition
[Download Full Paper]

Funmilayo Gift Adeshola1, Janet Daniel Ajang2, Brenda Mwanret Bwonlu3, Yunana Ishemu Zumba*4
ARDL, Exchange Rate, Deposit Interest Rate, Lending Interest Rate, Nigeria, Interest Rate.
We examine the long and short run impact of lending and deposit interest rates on exchange rate in Nigeria using the Autoregressive Distributed Lag (ARDL) model and annual data for the period 1981-2018. In Nigeria, there are two lending rates, i.e., prime and maximum lending rates, thus, we carry out robustness check to find out if the two interest rates have different impact on exchange rate in Nigeria. The result indicates that the relationship between lending interest and exchange rates in Nigeria is not sensitive to the type of lending interest rate used. Our findings reveal that increase in lending rate causes the Naira to depreciate significantly; making other currencies to be expensive against the Naira. However, we find that increase in deposit interest rate insignificantly appreciates the Naira against other currencies. Furthermore, we establish a negative significant relationship between GDP and exchange rate and a positive significant association between money supply and exchange rate in Nigeria. Based on our findings, we conclude that while lending interest rate, economic growth and money supply strongly influence value of the Naira against other currencies, deposit interest rate is weak in determining the rate at which the Naira is exchanged for other currencies.
[1] Dimitriou, D., Kenourgios, D., & Simos, T. (2017). Financial crises, exchange rate linkages and uncovered interest rate parity: evidence from G7 markets. Economic Modelling, http://dx.doi.org/10.1016/j.econmod.2017.06.003.

[2] Benigno, G., Benigno, P., & Ghironi, F. (2007). Interest rate rules for fixed exchange rate regimes. Journal of Dynamics and Control, 31, 2196-2211.

[3] Hnatkovska, V., Lahiri, A., & Vegh, C. A. (2013). Interest rate and the exchange rate: A non-monotonic tale. European Economic Review, 63, 68-93.

[4] Kraay, A., (2003). Do high interest rates defend currencies during speculative attacks? Journal of International Economics, 59, 297-321.

[5] Saraç, T. B., & Karagöz, K. (2016). Impact of short-term interest rate on exchange rate: The case of Turkey. Procedia Economics and Finance 38, 195-202.

[6] Muchiri, M. (2017). Effect of inflation and interest rates on foreign exchange rates in Kenya. Masters Project, School of Business, University of Nairobi.

[7] Adusei, M., & Gyapong, E. Y. (2017). The impact of macroeconomic variables on exchange rate volatility in Ghana: The partial least squares structural equation modelling approach. Research in International Business and Finance, http://dx.doi.org/doi:10.1016/j.ribaf.2017.07.081.

[8] Tafa, J. (2015). Relationship between exchange rates and interest rates: Case of Albania. Mediterranean Journal of Social Sciences MCSER, 6(4), 163-170. Doi:10.5901/mjss.2015.v6n4p163.

[9] Ajao, M. G., & Igbekoyi, O. E. (2015). The Determinants of real exchange rate volatility in Nigeria. Academic Journal of Interdisciplinary Studies, 2(1), 459-471.

[10] Perera, P. R. M., Silva, N. L. C., & Silva, N. K. L. (2017). The impact of interest rate in determining exchange Rate: Revisiting interest rate parity theory. Research Gate Sourced 12 August, 2019 from https://www.researchgate.net/publication/321360828.

[11] Zamanian, G., Pahlavani, M., & Ranjbarnouri, F. (2013). Causal relation between money stock and exchange rate under the fixed and floating regimes. International Journal of Academic Research in Progressive Education and Development, 2(1), 75-82.

[12] David, U. (2013). Monetary models and exchange rate determination: The Nigerian evidence. International Journal of Development and Management Review (INJODEMAR), 8(1), 172-197.

[13] Sean, M., Pastpipatkul, P., & Boonyakunakorn, P. (2018). Money supply, inflation and exchange rate movement: The case of Cambodia by Bayesian VAR approach. Journal of Management, Economics, and Industrial Organization, 3(1), 63-81.

[14] Lee, J, & Yue, C. (2017). Impacts of the US Dollar (USD) exchange rate on economic growth and the environment in the united states. Energy economics, 64, 170-176.

[15] Haug, A. A. (2002). Temporal aggregation and the power of co-integration tests: Monte Carlo study. Oxford Bulletin of Economics and Statistics, 64(4), 399-412.

[16] Jalil, A., & Ma, Y. (2008). Financial development and economic growth: time series evidence from Pakistan and china. Journal of Economic Cooperation, 29(2), 29-68.

[17] Murthy, V. N. R., & Akunade, A. A. (2016). Determinants of US health expenditure: evidence from autoregressive distributed lag (ARDL) approach to cointegration. Economic Modelling, 59, 67-73.

[18] Dicky. H., & Fuller, W. A. (1979). Distribution of the estimates for autoregressive time series with unit root. Journal of the American Statistical Association, 74, 427-431.

[19] Phillips, P. C. B., & Perron, P., (1988). Testing for unit root in time series regression. Biometrika, 75, 335-346.

[20] Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bound testing approach to the analysis of level relationships. Journal of Applied Economics, 16, 289-326.

[21] Tursoy, T. & Faisal, F. (2017). The impact of gold and crude oil prices on stock market in turkey: empirical evidence from ARDL bounds test and combined cointegration. Resources policy, http://dx.doi.org/10.1016/j.resourpol.2017.10.014.

[22] Pesaran, M. H., & Shin, Y. (1997). Working with microfit 4.0: Interactive Econometric Analysis, oxford University press, Oxford.

[23] Pesaran, M. H., & Shin, Y. (1999). An autoregressive distributed lag modelling approach to cointegration analysis. Paper presented at the econometric and economic theory in the twentieth century: the Ragnar Frisch centennial symposium Cambridge.

[24] Barkhordari, S., & Fattai, M. (2017). Reform of energy prices, energy intensity and technology: A case study of Iran (ARDL approach). Energy Strategy Reviews, 18, 18-23.

[25] Brown, R. L., Durbin. J., & Evans, J. M. (1975). Techniques for testing the constancy of regression relationships over time. Journal of the Royal Statistical Society, 37, 149-192.