THE INFLUENCE OF FISCAL AND MONETARY POLICIES ON EXCHANGE RATE DYNAMICS IN NIGERIA

Abstract

This paper examines the effects of fiscal and monetary policies on exchange rate dynamics in Nigeria. It aimed to clarify the links and impacts of government spending, total government revenue, real interest rates, broad money supply, GDP growth, and inflation on the exchange rate. The article provides a thorough examination of these economic variables by analyzing data from 2000 to 2022 using an ARDL model and Granger causality tests. The ARDL results show that an increase in government expenditure initially causes currency depreciation. A large influence is also seen by total government revenue, with a coefficient of -0.005274. Real interest rates are related to currencies appreciation on the monetary side, whereas depreciation is caused by a large money supply. Granger causality tests show that changes in exchange rates have a considerable impact on adjustments to government spending and total government revenue. Real interest rate fluctuations are greatly impacted by inflation, indicating a link of interdependence between both factors. The analysis comes to the conclusion that maintaining economic growth and stabilizing the exchange rate require coordinated monetary and fiscal measures. In order to properly control government spending, it is advised that fiscal and monetary policies be coordinated in order to respond to economic shocks. Additionally, stable interest rates should be maintained in order to draw in foreign investment. To increase Nigeria's economic stability and resilience, it is also advisable to implement adaptive policy measures and ongoing monitoring based on real-time data.