Ebere Ume Kalu , Ogochukwu E. Ugwu , Victor Chijioke Ndubuaku , Ozioma Patricia Ifeanyi (2019). Exchange Rate and Foreign Reserves Interface: Empirical Evidence from Nigeria. The Economics and Finance Letters, 6(1): 1-8. DOI: 10.18488/journal.29.2019.61.1.8
This work was set out to measure the responsiveness of foreign reserves to exchange rate variables with a focus on the Nigerian economy. Foreign reserve was used as a dependent variable and all the exchange rate related variables used as independent variables. Time series data spanning 1996 to 2016 was used. A combined use of the Auto Regressive Distributed Lag Model (ARDL) and correlation matrix were employed. It was found that a positively significant relationship exists between real exchange rate and reserves with nominal exchange rate sharing a positive but non-significant relationship with foreign reserves. This makes a case for proper policy direction in the management of exchange rate in a manner that produces the best economic results for the Nigerian economy. The results are considered useful for economies in the shape of Nigeria for generalization and policy direction in the management of foreign reserve and its interface with exchange rate and its related factors.
This study contributes to the existing literature by uncoupling exchange rate into nominal and real in measuring the nexus with foreign reserves. This study uses new estimation methodology which is the ARDL approach unlike prior studies that used OLS predominantly. The paper contributes the first logical analysis by carrying out pre-test, estimation proper and diagnostic analyses. The paper's primary contribution is that it exposes the fact that a nexus exists between foreign reserves and changes in exchange rate.