Foreign Direct Investment, Exchange Rate Policy and Economic Growth; Lessons for Nigerian Economic Recovery
1Aribatise Adekunle & 2Agu Victor Nnamdi
1 Department of Economics, Wesley University, Ondo State, Nigeria
2Department of Economics, Obafemi Awolowo University, Ile-Ife, Nigeria
Email: kundun95@gmail.com
Corresponding Author: Aribatise Adekunle
ABSTRACT
The study examined the causal relationship and dynamic interaction among Foreign Direct Investment, Exchange Rate and Real Gross Domestic Product in Nigeria. These were with the view to examining the relative effectiveness of Foreign Direct Investment and Exchange rate in addressing the Nigeria’s contemporary economic problems. Annual data over the period of 1986 to 2014, sourced from the World Bank Development Indicators, and the Central Bank of Nigeria (CBN) Statistical Bulletin, were used for the study. Time series econometrics (Granger Causality and Vector Error Correction Model) was applied to test the causal relationship, and the interaction among the variables respectively. The result of the Granger causality test shows that there is a unidirectional causality running from Foreign Direct Investment and Exchange rate to Real Gross Domestic Product respectively. Furthermore, the variance decomposition established that a shock on Foreign Direct Investment and Exchange rate respectively have significant and lasting impact on the Nigerian real gross domestic product long into the future. The paper recommends that FDI and Exchange rate are viable policy instruments that could inject a sustained drive for Nigerian economic recovery. Hence Government and the monetary authorities should adopt favorable exchange rate policy and encourage the inflow of Foreign Direct Investment in Nigeria so as to catalyze the economy towards sustainable growth. Keywords: VECM, Economic Growth, FDI, Exchange Rate, Variance Decomposition
