Developing Country Studies www.iiste.org ISSN 2224-607X (Paper) ISSN 2225-0565 (Online) Vol.7, No.7, 2017 86 Influence of Exchange Rate Movements on Economic Growth in Nigeria ABAYOMI, Muftau Adesina 1 ADEPOJU, Titilope Francis 2 AASA, Olaoluwa Paul 2 1.Department of Economics, School of Management Technology Federal University of Technology, Akure 2.Department of Project Management Technology, School of Management Technology Federal University of Technology, Akure Abstract Nigeria’s dwindling external reserves and exchange rate fluctuations have been major sources of concern to major stakeholders in recent times. Adopting a longitudinal research design, this study examines the influence of exchange rate movements on economic growth in Nigeria, using annual time series data from 1981 – 2014 obtained from the Central Bank of Nigeria Statistical Bulletins. Economic growth is the dependent variable proxied by Real Gross Domestic Product (RGDP) while the explanatory variables are nominal exchange rate, inflation rate as well as growth in money supply. The unit root test indicates that all variables are I(1) while Johansen cointegration test reveals a long run relationship between economic growth and the explanatory variables. The Error Correction Model indicates a negative short run causality running from nominal exchange rate to RGDP, and from growth in money supply to RGDP in Nigeria. The error correction term indicates that departure from long run equilibrium gets corrected at the rate 93.55 percent. The paper also reveals that long run Granger causality runs from growth in money supply to RGDP, and from growth in money supply to inflation rate. Also, long run Granger causality runs from exchange rate to inflation. All results are tested at 5% level of significance. The paper, therefore, recommends that Government should design export-oriented policies that would accelerate accretion to foreign reserves in order to reverse or, at least, minimize exchange rate depreciation. Finally, the Central Bank of Nigeria should ensure sound exchange rate, and inflation rate management with a view to promoting economic growth in Nigeria. Keywords: Exchange Rate, Economic Growth, Cointegration, Granger Causality, Error Correction Model. 1.0 Introduction Nigeria’s dwindling external reserves and exchange rate fluctuations have been major sources of concern to major stakeholders in recent times and this has captivated the interest of governments, researchers, and policymakers on the exchange rate debate. The fundamental role played by exchange rate in economic growth of developing nations, including Nigeria, cannot be over-emphasized. However, Nigeria’s mono-cultural economy which relies largely on oil exports is predisposed to financial shocks mainly driven by vicissitudes in oil prices. Exchange rate can simply be defined as the price of one country’s currency expressed in terms of another currency (Jhingan, 2005). It determines the relative prices of domestic and foreign goods, as well as the strength of external sector participation in the international trade. Exchange rate regime and interest rate remain important issues of discourse in international finance as well as in developing nations, with more economies embracing trade liberalization as a requisite for economic growth (Obansa, Okoroafor, Aluko & Millicent, 2013). Successive governments in Nigeria have switched between “dirty” float (deregulated) to fixed-but-adjustable exchange rate (regulated) regimes. Under dirty float regime, the value of foreign exchange is determined by the forces of demand and supply of major currencies but with sporadic central bank interventions in foreign exchange market. Active intervention results in changes in international reserves while indirect intervention, through changes in interest rates, liquidity and other financial instruments, does not result in changes in reserves (Edwards & Savastano, 2000). However, under the fixed-but-adjustable exchange rate regime, the nominal exchange rate is fixed but the Central Bank is not obliged to maintain the parity indefinitely. No tight constraints are imposed on the monetary and fiscal authorities, who can follow, if they so decide, policies that are consistent with preserving the parity. Under this regime, adjustments of the parity (devaluations) are a powerful policy instrument (Edwards & Savastano, 2000). Over the years, the exchange rate of the Naira has been largely influenced by the volume of net exports, volume of foreign reserves, exchange rate regime adopted as well as external shocks, among others. The Naira exchange rate was relatively stable between 1973 and 1979 during the oil boom era and when agricultural products accounted for more than 70% of the nation’s Gross Domestic Products [GDP] (Ewa, 2011). At the advent of the Structural Adjustment Programme (SAP) in 1986, the country moved from fixed-but-adjustable exchange rate (peg) system to “dirty” float regime. The latter is otherwise referred to as the managed float whereby monetary authorities intervene periodically in the foreign exchange market in order to attain some strategic objectives (Mordi, 2006). The contradiction in exchange rate policies exacerbated uncertainty as well as the unstable value of the Naira (Gbosi, 2005). For instance, the Naira has undergone persistent annual