Interest Rate And Exchange Rate In An Oil Dependent Economy: The Case Of Nigeria
Volume 4 - Issue 5, May 2020 Edition
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Author(s)
Funmilayo Gift Adeshola1, Janet Daniel Ajang2, Brenda Mwanret Bwonlu3, Yunana Ishemu Zumba*4
Keywords
ARDL, Exchange Rate, Deposit Interest Rate, Lending Interest Rate, Nigeria, Interest Rate.
Abstract
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.
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