Nigerian Journal of Banking and Financial Issues (NJBFI)

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

Abstract

This paper examines how fiscal and monetary policies impact the dynamics of the exchange rates in Nigeria using annual time-series data for the years 2000-2022 as available in the World Bank, World Development Indicators. The research considers government expenditure, government revenue, real interest rate and broad money supply as independent variables and uses Autoregressive Distributed Lag (ARDL) method and Granger causality analysis in order to examine how each variable affects the exchange rate movements with GDP growth and inflation as control variables. The findings indicate that the expansionary fiscal spending leads to short run artificially reduced naira to depreciation with an exchanging effect of government revenue. Turning to the monetary aspect, when the real interest rate goes up, money and money stock concepts on the currency appreciation are coupled, but broad money supply expansion is coupled with depreciation. Independence, or correlation through Granger causality tests indicates that changes in pride of exchange rates have a pronounced effect in fiscal adjustment and inflation has a strong effect on interest rate adjustments which denotes the interdependence between monetary policies and price stability. Such results highlight the moderated yet challenging interrelationships between fiscal and monetary tools in determining the exchange rate behaviour in Nigeria. The research concludes that a joint fiscal and monetary policy interventions are the key to attaining an exchange rate stability and sustainable GDP growth. Some of the policy recommendations are to increase fiscal-monetary coordination, quantitative easing fiscal policy by using counter cycles, fiscal policy monetary discipline through a balanced credit growth, mobilizing adaptive data-based models and diversifying the economy in order to expose external weaknesses. The combination of empirical data and theoretical outputs facilitates the study in contributing to knowledge on the management of an exchange rate in a resource-dependent economy and gives practical measures that would enhance the macroeconomic resiliencies in Nigeria.