FOREIGN EXCHANGE RATE VOLATILITY AND FOREIGN DIRECT INVESTMENT IN NIGERIA
Abstract
The study examined the impact of exchange rate volatility on foreign direct investment (FDI) inflows in Nigeria. The model's independent variables included exchange rate, interest rate, trade openness, and gross fixed capital formation, with FDI as the dependent variable. To address the study's specific objectives, the researchers utilized the Vector Error Correction Model, Impulse Response analysis, and forecast error decomposition. The analysis covered the period from 1981 to 2021. Results indicated that in the short run, exchange rate shocks are inversely related to FDI in Nigeria, with the relationship being statistically significant. This suggests that exchange rate fluctuations are a key short-term determinant of FDI inflows. Additionally, the study found that over 8% of the variance in FDI could be attributed to exchange rate fluctuations. Based on these findings, the study recommended a managed float exchange rate regime, with a specified band for government intervention to stabilize the exchange rate when necessary.
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