MODELING OF BALANCE OF PAYMENT AND EXCHANGE RATE IN NIGERIA
DOI:
https://doi.org/10.60787/tnamp-19-79-88Keywords:
Simultaneous equation, Interest rate, Inflation, Deficit, SurplusAbstract
This paper discusses the Balance of Payment (BOP) and Exchange rates in Nigeria so as to account for the two-way cause-and-effect relationship between balance of payment and exchange rate in Nigeria. The relevance of this lies in the fact that it could help to monitor the Balance of Payments and Exchange rates and act as an early warning signal for economic crisis.Monthly data on Nigeria exchange rate, interest rate, inflation and balance of payment for the period January 2004 to December, 2020 were obtained from the 2022 CBN Statistical Bulletin. The data were analyzed using indirect least squares estimation method of the simultaneous equation model. Results of the analyses show that (i) the data satisfied the exogenueity and simultaneity assumptions of the specified model (ii) relationships exist between exchange rate and BOP. As shown in the result there is balance of payment deficit due the negative impact of exchange rate on it. To forestall this problem, we recommended that there should be a reduction in government spending; higher interest rates and higher taxes as these could all have the effect of dampening consumer demand reducing the demand for imports.
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