Strategies for Resuscitating Foreign Exchange Market in a Depressed Economy (a Case Study in Nigeria)

St levergies for Resuscitating contrary tack mart place in a Depressed Eco noy (A eggshell Study in Nigeria) By Ijaiya Tahir Adeniyi B. sc (Hons) Econs From Lagos State University, Ojo, Lagos State, Nigeria CHAPTER ONE under mental synthesis 1. 1BACKGROUND OF THE STUDY betray compute arrangements in Nigeria digest undergone epochal changes all over the past four decades (Alaba, 2003). It shifted from a indomitable presidency in the mid- fractional a dozenties to a pegged arrangement in the midst of the 1970s and the mid-1980s, and finally, to the diverse types of the float regime since 1986, following the relieveion of the morphological Adjustment Programme (SAP).A regime of managed float, without both strong commitment to defending any hitticular uniformity, has been the predominant symptomatic of the floating regime in Nigeria since 1986 (Alaba, 2003). These changes ar non peculiar to the Naira as the US dollar was fixed in gold terms until 1971 when it was de-linked and has since been floated. The fixed win over coiffe up regime induced an overvaluation of the naira and was supported by convert control regulations that engendered markerificant distortions in the economy.That gave dismission to massive importee of finished goods with the adverse consequences for internal professional personduction, remnant of payments patch and the nations away go fors take. Moreover, the plosive consonant was bedeviled by sharp practices perpet identifyd by dealers and end-users of outside(prenominal) transmute. These and many opposite problems informed the adoption of a much than flexile alternate appraise regime in the context of the SAP, espouse in 1986.In theory and practice, a prolonged misalignment of the sub account in the abroad change foodstuff bequeath, in the medium term, tend to bear upon adversely on economic performance (MacDonald, 1997). Consequently, the authorities should al shipway fork out a t imely treatment to ensure that the sub tempo is in equilibrium. The mo scratch profitary authorities usually intervene through its monetary policy actions and operations in the coin securities industry to modulate the replace grade heading in the desired ruleion such that it ensures the competitiveness of the domestic economy.In Nigeria, of upshottaining a squ beistic give-and-take outrank for the naira is very crucial, given the structure of the economy, and the contend to minimize distortions in reapingion and consumption, summation the inflow of non- cover merchandise tax income and attract remote direct dowerment. In order to give vent to this, this pick out shall meditate the opposed turn securities industry in Nigeria with the vox populi of investigating the kin in the midst of the substitution range and some macroeconomic shiftings. 1. 2STATEMENT OF RESEARCH PROBLEMThere has been an ongoing debate on the assume metamorphose dictate poli cy in exploitation countries. The debate guidancees on the degree of fluctuations in the flip regulate in the face of internal and extraneous shocks. modify prescribe fluctuations ar likely, in turn, to run into economic performance (Kandil and Mirzaie, 2003). In judging the desirability of substitution come out fluctuations in Nigeria, it becomes necessary to appraise the various change over localize regimes adopted in Nigeria and evaluate their cause on take harvest-time, purpose of domestic expenses and some other macroeconomic shiftings.Their study setbacks would in addition be identified in order to aim future course of action. 1. 3OBJECTIVES OF THE STUDY The specific objectives of this read atomic number 18 i) to point the deciding(prenominal)s of the outside(a) diversify swan ii) to assay the impact of strange change grades on the cheer of the landed estates outturn iii) to realize the impact of irrelevant shift regularizes on foreign patronage iv) to examine the impact of foreign switch regularizes on outside carry v) to examine the impact of foreign shift computes on domestic equipment casualtys of goods and service. . 4RESEARCH METHODOLOGY The Econometric apostrophize that would be adopted to examine the relevance of the turn regulate in the official foreign deputise market to the economic growth of Nigeria shall be the Ordinary Least cheering (OLS) method. This econometric method would be apply because it is very original and astray employ in researches. Simple regression toward the mean flummoxs shall be adopted to set about the prep ar of foreign swop esteem on economic growth, foreign condescension, foreign reserve and the domestic hurts of goods and service in Nigeria.The attempt of the hypotheses front stated would be done at 5% direct of consequence and as such, the oecumenicalization of the hold findings would be limited to this extremity. Secondary selective inform ation would be used in this study. The applicable information to be used would be sourced from the Central trust of Nigerias statistical reports, annual reports and af theatreation of accounts for the years under revue. 1. 5RESEARCH QUESTIONS The research questions, which would guide this study, are as follows i) What are the determinants of foreign supplant appreciates? ii) What has been the impact of foreign convince value on the growth of Nigerian economy? ii) How does the foreign rally rate impacts on foreign contend of Nigeria? iv) What is the affinity mingled with foreign throw rate and remote reserve? v) How does the substitute rate affects the domestic take ins of goods and work in Nigeria? 1. 6RESEARCH HYPOTHESES The research hypotheses to be sieveed in the course of this study are stated below as HYPOTHESIS I Ho That in that respect is no epochal consanguinity surrounded by rallying rate and the economic growth of Nigeria. H1 That there is a sig nificant relationship amongst exchange rate and the economic growth of Nigeria.HYPOTHESIS II Ho That there is no significant relationship amidst exchange rate and foreign trade in Nigeria. H1 That there is a significant relationship surrounded by exchange rate and foreign trade in Nigeria. HYPOTHESIS collar Ho That there is no significant relationship between exchange rate and external reserve of Nigeria. H1 That there is a significant relationship between exchange rate and external reserve of Nigeria. HYPOTHESIS IV Ho That there is no significant relationship between exchange rate and domestic costs of goods and prices in Nigeria.H1 That there is a significant relationship between exchange rate and domestic prices of goods and prices in Nigeria. 1. 7 mannikinS SPECIFICATION toughie I gross domestic harvest-festival = a0 + a1 exr + e Where gross domestic crossroad-Gross Domestic Product exr - swop rate a0 and a1 -Parameters e -Error term A PRIORI EXPECTATION It is antici pate that a0 0 and a1 O supersede rate is the price of a silver in terms of another(prenominal) notes while gain domestic product is the value of the goods and services produced in a democracy within a specific geological period of time. supersede rate is expect to affect the gross domestic product vetoly. A utmost exchange rate would not abide for the logical implicationation of large(p) goods that are use up for productive activity, thereby ruin economic growth. This is ground on neoclassical trade dumbfounds. mannequin II bot = b0 + b1 exr + e Where bot- symmetry of trade exr - flip-flop rate b0 and b1 -Parameters e -Error term A PRIORI EXPECTATION It is judge that b0 0 and b1 O Balance of trade is the net difference between summate merchandise and import.The relationship between exchange rate and balance of trade is expected to be unequivocal negative. This is because a highschool exchange rate would encourage merchandiseation and discourage importatio n and thereby making the balance of trade favourable i. e positive (when export is higher than import). assume trinity exrev = c0 + c1 exr + e Where exrev-External reserve exr - transform rate c0 and c1-Parameters e -Error term A PRIORI EXPECTATION It is expected that c0 0 and c1 O External reserve is the come in of money which a estate holds in foreign currency.It re fork overs the savings of a nation. It is often accumulated from the proceeds from external trade. A high exchange rate would mean that a country would convey to pay much to pay for the goods and services from other countries and as a moment would not have much as external reserve. So the relationship between exchange rate and external reserve is expected to be negative. deterrent example IV cost-of-living forefinger = d0 + d1 exr + e Where cpi -Consumer price Index exr - put back rate d0 and d1-Parameters e -Error term A PRIORI EXPECTATION It is expected that d0 0 and d1 OConsumer price indicator is a vizor of the general price take aim in an economy and as such an indicator of the trite of living of the people. A high exchange rate would impair production causing the general price train to rise. Therefore, the relationship between exchange rate and consumer price train is expected to be direct i. e positive. mould V gdp = e0 + e1 exr + e2 bot + e3 exrev + e4 cpi + e Where exr - throw rate bot-Balance of trade exrev-External reserve cpi -Consumer price Index e0, e1, e2, e3 and e4 -Parameters e -Error termA PRIORI EXPECTATION It is expected that e0 0, e1 0 e2 0 e3 0, e4 0 accordanceing to the neoclassical trade model, exchange rate is expected to affect the gross domestic product negatively. A high exchange rate would not allow for the importation of metropolis goods that are bespeak for productive activity, thereby impair economic growth. Balance of trade represents the net trade. A favourable balance of trade (i. e net export) would increase the gross domestic produ ct. So balance of trade would vary straightaway with the gross domestic product.The external reserve is withal expected to have positive relationship with the external reserve. High external reserve would brace the foreign exchange market which hence creates causative environment for ameliorate production and trade. Consumer price index is an indicator of the precedent of living of the people. A high tired of living is expected to increase labour productiveness and thereby stimulating growth. So consumer price index would vary in a flash with the gross domestic product. A high exchange rate would impair production causing the general price level to rise.Therefore, the relationship between exchange rate and consumer price level is expected to be direct i. e positive. 1. 8SIGNIFICANCE OF THE STUDY The significance of this study are as follows i) It would provide an empirical effect of exchange rate on the economic growth ii) It would contribute to existing literature by ident ifying the major factors that are responsible for the spread between the official and parallel foreign exchange market rates in Nigeria iii) Lastly, it would provide policy recommendations to policy-makers on ways to pertain the foreign exchange market in Nigeria. . 9SCOPE AND LIMITATION OF THE STUDY This study would focus extensively on the foreign exchange policies of Nigerian regimen and how they impacted on the structure of the foreign exchange market. The spread between the parallel and official foreign exchange market shall withal be examined with the view of identifying the factors responsible for the differences. In the bid to identify the strategies for resuscitating the foreign exchange market in Nigeria, the importance of the official exchange rate in the economic growth process of Nigeria shall be empirically investigated.The influence of the external reserve shall also be given due consideration. Besides, major issues in the foreign exchange policy and current devel opment in the Nigerian foreign exchange market shall be examined. These would enhance the suggestion of the ways to resuscitate the foreign exchange market in Nigeria. 1. 10ORGANISATION OF OTHER CHAPTER 2-5 The succour of this study shall contain four chapters. Chapter two would present the literature review on the subject matter.The methodology to be adopted in the study would be stated in chapter three. Chapter four shall focus on the creation and interpretation of the regression bequeaths. The last chapter chapter five, would present the summary of the findings, conclusion and appropriate recommendations. REFERENCES Alaba, O. B. (2003). rallying rate uncertainness and foreign direct enthronement in Nigeria. Being a newsprint presented at the WIDER Conference on manduction Global Prosperity, Helsinki, Finland, 6-7 September. Kandil, M. and Mirzaie, I. A. 2003). The Effect of Exchange rate Fluctuations of Output and Prices Evidence from growing Countries. IMF Working s ubject, WP/03/200, October. MacDonald, R. (1997). What determines Real Exchange grades? The Long and Short of it. IMF look for cover, WP/97/21, January. CHAPTER TWO LITERATURE REVIEW 1. INTRODUTION Exchange rate fluctuations and their do on macro economic proteans have generated an economics debate on the desirability of exchange rate policy. In judging the desirability of exchange rate fluctuations, it ecomes, necessary to evaluate their effects on widening, price level and other macro economic disputation. film and deliver jobs determine the effects. The justification for this study was amply exemplified by the observation of the Secretary to the governance of the Federation of Nigeria, Ekaette, (2002). According to him, continuous wear and tear of the Naira has encouraged currency theory which unscrupulous individuals would naturally prefer to productive activity, give-up the ghosting to the diversion of invest able funds to non-productive activities.In the same vei n, the former Governor of the Central Bank of Nigeria (CBN) Sanusi, (2002) stated that the prime(a) of exchange rate regime is a censorious issue. Suffice it to say that the current high interest rate structure represents the opportunity cost which the economy is paying for a misaligned exchange rate regime, indicative of the structural imbalance in the economy. The ultimate aim of this chapter is to present diversified views on the foreign exchange market and its mechanism and to also explain the exchange regimes of Nigeria as sound as their effects on macroeconomic inconstants. 2. volt-ampereIOUS VIEWS ON trade RATE FLUCTUATIONS IN THE FOREIGN EXHANGE merchandise According to Kandil and Mirzaie (2003), unexpect exchange rate whitethorn be the conduct of a change in agents rational forecast, under a fixed exchange rate regime, or the result of an unexpected movement in the exchange rate, under a whippy rate regime. They state that in line with theorys prediction, the effec ts of unlooked-for exchange rate fluctuations on output and prices may be positive or negative across countries, according to the congener effects of currency fluctuations on the supply and demand of the respective countries.On the hand, Kandil and Mirzaie (2003) opined that movements in the exchange rate that are consonant with agents expected values have limited effects on the macro economy. They come along, noted that in many developing countries, high variability of exchange rate fluctuations al around its anticipated value may generate adverse effects in the form of higher price inflation and larger output contraction. Rutasitara, L. (2004) discover that the parallel market exerted greater influence on the exchange rate during periods of shortage and controls it disappeared as moreover liberalization took hold.He argued that while a more or little stable nominal exchange rate is sought after(prenominal) for trade and investment decisions, it is more eventful to mai ntain the rate at sustainable levels. He noted that the level and prospects of the foreign reserves position are important in this respect. He advised that output and export strategies to ensure a well supplied foreign exchange market need to be furthered. The supply of foreign currency would also include foreign grants and/or loans. Cheong, (2004) noted that the higher moments in the exchange rate is non-constantly wide-ranging with clustering.He investigated a possible effect of risk in exchange rates on import trade in the UK. The empirical results show that suspicion in exchange rates negatively affects international trade and, more importantly, the effect is statistically significant. Buffie, etal. (2004) focused on the management of highly headstrong shocks to aid flows in three post-stabilization African economies with de jure flexible exchange rates. much(prenominal) shocks were found to have beneficent long-run effects. He however noted that when currency substitution is high they can produce dramatic macroeconomic management problems in the short run.Alaba, (2003) argued that the parallel market exchange rate is the more important driver of activities in the Nigerian economy. He indeed noted that proper management of exchange rate, to forestall costly distortions, constitutes an important pillar in determine flow of FDI to Nigeria and indeed Sub-Sahara African countries. He opined that it is important that monetary authorities ensure transparency in determining exchange rate process such that various economic distortions associated with exchange rate may be minimized. 3. EFFECTS OF FOREIGN EXCHANGE food market INSTABILITYKandil, (2004) investigated the effect of exchange rate fluctuations on economic performance in developing countries. The investigation presented a notional model that analysed movements in the exchange rate into anticipated and unanticipated components. Anticipated exchange rate depreciation determines the cost of imported m ediate goods and, hence, the output supplied. In contrast, unanticipated currency fluctuations determine conglomeration demand through exports, imports, and the demand for currency, and determine conflate supply through the cost of imported intermediate goods.The start channel increases aggregate demand currency depreciation increases exports and decreases imports. The second channel decreases aggregate demand. On the supply side, Kandil, (2004) explains that currency depreciation increases the cost to bargain for intermediate goods and decreases the output supplied. The combined effects of the three channels are doubtful on output and price. The paper investigates the effects of exchange rate fluctuations (both anticipated and unanticipated) using output and price info for a sample of twenty-two developing countries.Kandil, (2004) concluded that for a varying degree of openness, exchange rate fluctuations generate adverse effects on economic performance in a renewing of deve loping countries. These effects are bare by output contraction and price inflation in the face of currency depreciation. Indeed, concerns about the adverse effects of exchange rate depreciation on economic performance are supported by the evidence of macroeconomic performance for a sample of twenty-two developing countries.For policy implications, Kandil, (2004) suggests that exchange rate policies should aim at minimizing unanticipated currency fluctuations to insulate economic performance from the adverse effects of this variability in developing countries. Osakwe, (2002) examined the choice of exchange rate regime using a speculative approach shot model that took into account the legitimate effects of unanticipated changes in in truth exchange rates. It also co-ordinated two features that played prominent roles in recent currency crises in emerging markets currency substitution and vapourific capital flows.The two approaches were applied to incorporate the authorized effe cts of unanticipated changes in exchange rates into standard models of exchange rate regimes. In the first approach, the effects were introduced directly by assuming that the monetary imprimaturs liberation function depended exclusively on the variance of real output but that aggregate demand or output depended, among other factors, on the deviation of actual from expected changes in the real exchange rate.In the second approach, the real effects of unanticipated exchange rate changes were incorporated indirectly by assuming that the monetary authoritys loss function depended on the variance of real output as well as the variance of the real exchange rate. It was concluded that the traditional models of exchange rate regimes ignore the destabilizing effects of sharp and unanticipated exchange rate movements. Odusola and Akinlo, (2001) focused on the link among the naira depreciation, inflation, and output in Nigeria.Evidence from their study revealed the reality of mixed results on the impacts of the exchange rate depreciation on the output. They spy that the impulse response functions exerted an expansionary impact of the exchange rate depreciation on the output in both medium and long terms. The opposite (contractionary impact) was however observe for the short-term horizon. These results tend to suggest that the adoption of a flexible exchange rate body does not necessary lead to output expansion, particularly in the short term.They noted that issues such as discipline, confidence, and believability on the part of the political relation are essential. However, these issues are apparently wanting(p) in Nigeria, as partly reflected in several policy reversals. Dekle (2002) highly-developed a model of an exporting firm that experiences fluctuating exchange rates and shocks to its cash flow. The firm uses its cash flow and borrows from the monetary markets to produce for export later in the period. They noted that exchange rate and shocks to cash flows are correlated, but the correlation could be positive or negative.If, for example, they are negatively correlated, then the firm will suffer from low cash flows when its exchange rate is depreciated. That is, the firms production will be agonistic exactly at the time when its export opportunities are greatest. This provides the rationale for the firm to hedge against shocks to its cash flow. Dekle (2002) related nominal exchange rates to export volumes at the firm level and finds that export volumes are strongly affected by changes in exchange rates. As in earlier work, they too found that prices are sticky in the buyers currency.In their model of exports, the strong response of export volumes to exchange rate fluctuations arises not because of changes in the buyers currency prices, but because of a loosening of finance constraints, either through the direct beneficial effect of exchange rate shocks on cash flows, or through hedging activities. Uncertainty in exchange rates whic h immediately followed the collapse of the Bretton Woods system of rules may be decomposed into two components. The first reflects systematic movement of the exchange rate and the second, exchange volatility (Darby et al. , 1999).Exchange rate volatility is usually taken as some measure of the dispersion of the rate over some period of time. Volatility of the rate impacts on growth through a variety of channels, including investment and trade. Interest in exchange rate dubiety on investment stems from the standard result in option pricing theory, which suggests that the value of an option increases with an increase in the underlying volatility of the stock (Accam, 1997). Kosteletou and Liargovas (2000) study the direction of effects of exchange rate variability on the pattern and flow of investment.The study suggests that in theory, there is no clear pass over distinction concerning the direction of such a relationship. It identifies at least six competing models in the literatur e, categorised under the trade integrated models and models of financial behaviour. The first category according to Kosteletou and Liargovas (2000) distinguishes between the traded and non-traded goods model. The second category distinguishes between the monetary approach to balance of payments, the strategic behaviour of international firms, the imperfect-capital-market theory and relative labour cost theory.The first assumption (model) suggests that for a developing country which is a price taker, an exogenous inflow of capital will lead to exchange rate appreciation or depreciation, depending on whether foreign exchange is used to finance domestic spending or capital solicitation in the traded and non-traded domain. The second model is the model of financial behaviour. According to the (portfolio) model, financial and capital liberalisation in countries result in increase in total inflows and outflows.The proliferation of exchange rate systems, especially in developing countri es which curtail the forces for long, suggest that further attention should be given to the degree to which these regimes influence the behaviour of economic fundamentals, including the flow of investment. The question of what exchange management dodging a country wishing to encourage foreign flows of investment should adopt is still unclearly resolved in the literature. Accam (1997) reviews the effect of exchange rate dissymmetry on macroeconomic performance with specific reference to the effects on investment and trade.In the survey, Fiani and de Melo (1990) found that unstable macroeconomic environment constitutes one of the major impediments to investment in many Less Developed Countries (LDCs). The authors appraisal an OLS regression of the fixed country effects of total and private investment in 20 countries using the standard deviation of the exchange rate as a proxy for instableness. The study finds a negative sign associated with the coefficient of exchange rate uncerta inty. Serven and Solimano (1992), also investigates economic adjustment and nvestment performance for 15 developing countries using the pooled cross-section time series data from 1975 to 1988. The investment equating pretendd in the study used exchange rate and inflation as proxies for instability, and in each case, instability was measured by the coefficient of the sport of the relevant variables over three years. The two measures were found to be jointly significant in producing negative effect on investment. The same effect was sustain by Hadjimicheal et als (1995) study on growth, savings and investment performance of 41 developing countries between 1986 and 1993. favourableberg (1993) considers the effects of exchange rate uncertainty on investment using conditional measure of volatility. The paper suggests that the sign of the effect of price variability on investment and intentness profitability is unresolved in the theoretical literature primarily because the sign of the relationship depends on the balance of (i) negative effects of risk averting of investors (ii) negative effects from investment irreversibility (iii) positive effects from profit convex shape in prices (iv) negative effects from a profit and price uncertainty relationship that is possible under imperfect competition.The author concludes that the direction of effect of exchange rate uncertainty on investment activity clay an empirical question. Agenor (1991) using a sample of twenty-three developing countries, regressed output growth on contemporaneous and lagged levels of the real exchange rate and on deviations of actual changes from expected ones in the real exchange rate, government spending, the money supply, and foreign income. The results showed that surprises in real exchange rate depreciation rattling boosted output growth, but that depreciations of the level of the real exchange rate exerted a contractionary effect.Morley (1992) analyzed the effect of real exchange rat es on output for twenty-eight devaluation experiences in developing countries using a regression framework. after the base of controls for factors that could simultaneously induce devaluation and reduce output including terms of trade, import growth, the money supply, and the fiscal balance, he observed that depreciation of the level of the real exchange rate reduced the output.Rodriguez and Diaz (1995) supposed a six-variable VAR output growth, real wage growth, exchange rate depreciation, inflation, monetary growth, and the Solow residuals in an attempt to decompose the movements of Peruvian output. They observed that output growth could mainly be explained by own shocks but was negatively affected by increases in exchange rate depreciation as well. Rogers and Wang (1995) obtained similar results for Mexico. In a five-variable VAR model output, government spending, inflation, the real exchange rate, and money growth most variations in the Mexican output resulted from own sh ocks.They however noted that exchange rate depreciations led to a decline in output. 2. 4EXCHANGE RATE REGIMES IN NIGERIA Ekaette, (2002) noted that one major challenge that had confronted this administration since it assumed powerfulness in whitethorn 1999 was how to quickly put the economy back on the path of sustainable growth. According to him, most of the banks are suspected to have abandoned real banking for round tripping (the diversion of official inappropriate Exchange to the Parallel trade).Soleye, (1985) then Honourable Minister of Finance stated that conscious effort aimed at the management of the Nigerian foreign exchange resources began in 1962 with the inception of the Exchange Control Act, which was directed at spillage the management of the remote Exchange from its erstwhile colonial pattern. Oyejide, (1985) stated that the Nigerian spank was introduced in 1959. Its external value was fixed at par with the British drum Sterling which, in turn, defined its Uni ted States Dollar(USD) value as $2 . 80.Nigeria joined the International Monetary Fund (IMF) after Independence, and the Nigerian Pound had its parity defined, in June 1962, in terms of Gold at one Nigerian Pound equals 2. 48828 grams of fine gold. This confirmed its master key USD par value. Similarly, the exchange rate of the Nigerian Pound for the British Pound Sterling was determined via its gold parity. However, the superlative was devalued by 14. 3 per cent against its gold parity in November, 1967. Since Nigeria did not devalue in tandem, the value of the Nigerian Pound became 1. 17 British Pounds Sterling.The Naira replaced the Nigerian Pound as Nigerias currency in January 1973, its par value was set at half that of the pound. Hence the exchange rate became $1. 52 to the naira. The firm relationship between the USD and the naira was terminated in April 1974 the fixed rate for sterling had been broken earlier in June 1972, when the sterling started to float officially. In February 1978, the system of determining the naira exchange rate against a basket of currencies of Nigerias main trading partners was finally adopted. According to Ugbebor (1998), the Oil glut of 1981 led to a crisis in the Foreign Exchange Market (FEM) in 1982.In December 1983 there was a change in government. With effect from January 1984 and again in May 1984 additional exchange control measures were introduced. Another change in government took place in August 1985. In September 1986, the Second-Tier Foreign Exchange Market (SFEM) was introduced. Under SFEM, the exchange rate was floated when it became obvious that a unyielding or controlled exchange rate would not ensure internal balance. The principles of the Structural Adjustment Programme (SAP) were adopted leading to a market orient approach to price ending.The Second Tier rate was determined by auction at the SFEM using (a) the average rate pricing method, (b) the peripheral rate pricing method, (c) the Dutch Auction body (DAS) which was introduced in April 1987, whereby the CBN bought and sell Foreign Exchange in this market and supplied the demand of the authorized dealers in full. The First-Tier rate was still applicable to Debt Service payments, other public sector disbursements and pre-SFEM transactions. The merger of the two markets in July 1987 to form an enlarged FEM was more expert than real.According to Akinmoladun (1990), the gap between the two rates began to grow shortly after. In January 1989, the DAS was re-introduced and the Dual Exchange roll system FEM merged with the Inter-bank market to form IFEM. By March 1992 there was a complete floating of the naira. Another change in government in August, 1993 ushered in a new fixed exchange rate. In 1995, the Autonomous Foreign Exchange Market (AFEM) was introduced, under a policy which allowed for Central Bank of Nigeria intervention on a predetermined root word instead of arbitrarily.Under AFEM, Bureaux De interchange would buy and sell from in camera-sourced Foreign exchange at the AFEM rate. The fixed exchange rate was reserved for public sector use. In 1993, the Parallel Market and Bureaux de diversity exchange rates were almost replicate the devalued First-Tier rate for the naira. The authorities saw this as a signal of a depreciation campaign which needed correction. This led to a re-introduction of a fixed exchange rate which pegged the naira at N21. 996 to $1 in 1994. In January 1997, the naira was eggly pegged and a pro rata system of FE allocation to end- users was adopted.The Foreign Exchange Market was further liberalized in October, 1999 with the introduction of an Inter-bank Foreign Exchange Market (IFEM). 2. 5STRUCTURE OF FOREIGN EXCHANGE MARKET IN NIGERIA The exchange control system was unable to take an appropriate mechanism for foreign exchange allocation in amity with the goal of internal balance. This led to the introduction of the Second-tier Foreign Exchange Market (SFEM) in Sep tember, 1986. Under SFEM, the determination of the Naira exchange rate and allocation of foreign exchange were based on market forces.To enlarge the scope of the Foreign Exchange Market Bureaux de Change were introduced in 1989 for dealing in privately sourced foreign exchange. As a result of volatility in rates, further reforms were introduced in the Foreign Exchange Market in 1994. These included the formal pegging of the naira exchange rate, the centralisation of foreign exchange in the CBN, the restriction of Bureaux de Change to buy foreign exchange as agents of the CBN, the reaffirmation of the illegality of the parallel market and the discontinuation of open accounts and bills for collection as means of payments sectors.The Foreign Exchange Market was liberalised in 1995 with the introduction of an Autonomous Foreign Exchange Market (AFEM) for the sale of foreign exchange to end-users by the CBN through selected authorised dealers at market determined exchange rate. In additi on, Bureaux de Change were once more accorded the status of authorized buyers and sellers of foreign exchange. With the failure of the Autonomous Foreign Exchange Market (AFEM), the Foreign Exchange Market was further liberalized in October, 1999 with the introduction of an Inter-bank Foreign Exchange Market (IFEM).The IFEM was designed as a two-part quote system, and intended to diversify the supply of foreign exchange in the economy by encouraging the funding of the inter-bank operations from privately-earned foreign exchange. The IFEM also aimed at assisting the naira to achieve a realistic exchange rate. The operation of the IFEM, however, experienced similar problems and setbacks as the AFEM, owing to supply-side rigidities, the persistent expansionary fiscal operations of government and the attendant problem of persistent excess liquidity in the system. The mark of the Nigerian foreign exchange market needs to be highlighted.The countrys foreign exchange earnings are more th an 90 per cent dependent on crude oil export receipts. The result is that the volatility of the world oil market prices has a direct impact on the supply of foreign exchange. Moreover, the oil sector contributes more than 80 per cent of government revenue. Thus, when the world oil price is high, the revenue share by the three tiers of government rise correspondingly and, as has been observed since the early 1970s, elicited comparable expenditure increases, which had been difficult to bring atomic pile when oil prices collapse and revenues fall concomitantly.Indeed, such unsustainable expenditure level had been at the root of high government deficit spending. It is therefore important that reserves be built up when the price is high to cushion the effect of revenue shortfall on government spending when oil price falls in the international oil market. Specifically, the sustained demand constrict and the consequent depreciation of the naira exchange rate under the IFEM were traced t o the following causes. ? hold in sources of foreign exchange supply.In particular, the anticipated supplies from autonomous sources, such as oil companies, banks and non-bank financial institutions were significantly below what was required to broaden and deepen the market ? The excess liquidity in the system induced by the commute of government accounts from the CBN to banks and the huge extra-budgetary spending in 1999 on unproductive ventures ? The to a great extent debt service burden and ? Speculative demand, driven by uncertainties created by hearty and political unrest, expectations of future depreciation of the naira, as well as the deterioration of the external sector position.It became a matter of serious concern that patronage the huge center of foreign exchange, which the CBN supplied to the foreign exchange market, the impact was not reflected in the performance of the real sector of the economy. Arising from Nigerias high import propensity of finished consumer g oods, the foreign exchange earnings from oil proceed to generate output and employment growth in other countries from which Nigerias imports originated. This development necessitated a change in policy on twenty-second July 2002, when the demand pressure in the foreign exchange market increase and the depletion in external reserves level persisted.The CBN thus, re-introduced the Dutch Auction System (DAS) to replace the IFEM. The DAS was designed to achieve a realistic exchange rate of the naira that will stem the excessive demand for foreign exchange, economise the dwindling external reserves and achieve a realistic exchange rate for the naira. The DAS was conceived as a two-way auction system in which both the CBN and authorised dealers would participate in the foreign exchange market to buy and sell foreign exchange. The CBN was expected to determine the amount of foreign exchange it is willing to sell at the price buyers are willing to buy.The marginal rate, which by definiti on is the rate that clears the market, represents the ruling rate at the auction. Since its introduction in July 2002, the DAS has been largely successful in achieving the objectives of the monetary authorities. Generally, it has assisted in narrowing the arbitrage premium from double soma to a single digit, until the emergence of irrational market exuberance in the fourth quarter of 2003. Secondly, the DAS has enhanced the relative stability of the naira, vis-a-vis the US dollar-the intervention currency.Specifically, the naira has fluctuated within a single digit band, since the DAS was introduced in July 2002. Thirdly, it has also assisted in stemming the spate of capital flight and curbing rent-seeking amongst market operators. REFERENCES Accam B. (1997). Survey of Measurement of Exchange pass judgment Instability, Mimeo. Agenor, Pierre-Richard (1991). Output, Devaluation and the Real Exchange Rate in growing Countries. Weltwintschaftliches Archiv vol. 127, no. 1, pp. 1841. Akinmoladun, O. (1990). An Appraisal of Foreign Exchange Management in Nigeria since the introduction of the Structural Adjustment Programme.Proceedings of the 1990 One Day seminar Published by the Nigerian economic Society PP 29 69. Alaba, O. B. (2003). Exchange rate uncertainty and foreign direct investment in Nigeria. Being a paper presented at the WIDER Conference on Sharing Global Prosperity, Helsinki, Finland, September. Betts, C. M. and Kehoe, T. J. (2001). Tradability of Goods and Real Exchange Rate Fluctuations. make-up presented at a seminar, January. Buffie, E. , Adam, C. , Connell, S. and Pattillo, C. (2004). Exchange Rate indemnity and the Management of Official and Private Capital Flows in Africa.IMF Working Paper WP/04/216, November. Cheong, C. (2004). Does the risk of exchange rate fluctuation really affect international trade flows between countries?. economic science Bulletin, Vol. 6, No. 4, pp. 1? 8. Available at http//www. economicsbulletin. com/2004/volu me6/EB? 04F10002A. pdf Darby J. , Hallet, A. H. , Ireland, J. and Piscitelli, L. (1999). Exchange Rate Uncertainty and Business Sector Investment, Paper Prepared for a workshop on Uncertainty and Factor Demand Hamburg, August. Dekle, R. , (2001). Exchange Rates and Corporate Exposure Evidence from Japanese libertine Level Data, mimeo.Ekaette, U. J (2002). Monetary Policy and Exchange Rate Stability, Proceedings of a One day Seminar held on 23 May 2002, Federal Palace Hotel, Lagos. Publisher The Nigerian Economic Society. Pp (ix) (xi). Goldberg L. S. (1993). Exchange Rates and Investment in United States Industry. reexamination of political economy and Statistics vol. LXXV pp. 575-88. Kandil, M. (2004). Exchange rate fluctuations and economic activity in growing countries theory and evidence. Journal of Economic Development, vol. 29, No. 1, June. Kandil, M. and Mirzaie, I. (2003). The effects of Exchange rate fluctuations on Output and Prices Evidence from developing countries. IMF Working Paper WP/03/200, October. Kosteletou N. and Liargovas, P. (2000), Foreign Direct Investment and Real Exchange Inter-linkages, Open Economies Review vol. 11 pp. 135-48. Morley, S. A. (1992). On the Effect of Devaluation During Stabilization Programs in LDCs. Review of Economics and Statistics vol. 74, No. 1, pp. 2127. Odusola, A. F. and Akinlo, A. E. (2001). Output, Inflation and Exchange rate in Developing Countries. The Developing Economies, vol. 34(2), June. Osakwe, P. N. 2002). Currency Fluctuations, Liability Dollarization, and the Choice of Exchange Rate Regimes in Emerging Markets. Bank of Canada Working Paper 2002-6, February. Oyejide, T A. (1985). Exchange Rate Policy for Nigeria Some options and their consequences. Proceedings of the 1985 One-Day Workshop Published by the Nigeria Economic Society pp 17 32. Rowland, P. (2003). Forecasting the USD/COP Exchange Rate A Random Walk with a Variable Drift (A paper downloaded from the internet). Rutasitara, L. (2004) . Exchange rate regimes and inflation in Tanzania. AERC Research Paper 138, February.Soleye, O. O. (1985). Proceedings of the 1985 One-Day Workshop Published by the Nigeria Economic Society pp. 15 16. Ugbebor, C. O. (1998). Development of the Nigerian Foreign Exchange Market (An overview), an original essay submitted to the Department of Economics, Unversity of Ibadan. CHAPTER common chord RESEARCH METHODOLOGY 3. 1INTRODUCTION This chapter explains the various techniques used in collecting data for this study. It also provides the background against which the study is being carried out and it also states the extent to which the findings can be generalised. . 2RESEARCH DESIGN This research work intends to empirically examine the Nigerian foreign exchange market. It shall consider the influence of fluctuations in the exchange rate on major macroeconomic variables in Nigeria. The study shall focus mainly on the relationship that exists between exchange rate, economic growth, foreign trade, external reserve and the domestic prices of goods and services in Nigeria. Regression epitome method shall be employed to investigate the relationship between the specify variables with data spanning between 1980 and 2005. 3. RESEARCH QUESTIONS The study shall examine the following questions 1. What are the determinants of foreign exchange rates? 2. What has been the impact of foreign exchange rate on the growth of Nigerian economy? 3. How does the foreign exchange rate impacts on foreign trade of Nigeria? 4. What is the relationship between foreign exchange rate and external reserve? 5. How does the exchange rate affects the domestic prices of goods and services in Nigeria? 3. 4RESEEARH METHODOLGY 3. 4. 1 SOURCES OF DATA Secondary data shall be the basis for data analysis in this study.We shall rely much on the various publications of Central Bank of Nigeria (CBN) Statistical Bulletin, Annual Reports and Financial Reports, Federal confidence of Statistics (FOS) annual re ports (FOS), Conference papers, journals etc. The variables for which data would be sourced include Exchange Rate, Gross Domestic Product, Balance of Trade, External Reserve and Consumer Price Index. 3. 4. 2 TECHNIQUE OF DATA compend We shall employ econometric technique to judge the contestations of the various economic relationship established in our models.The Econometric approach that would be adopted to examine impact of foreign exchange market operations on macro economic variables in Nigeria shall be the transmitter Autoregressive Model (VARM) method. This econometric method would be used because it is very reliable and widely used in researches. The test of the hypotheses earlier stated would be done at 5% level of significance and as such, the evocation of the study findings would be limited to this extent. 3. 5 pose RE-SPECIFICATION MODEL I gdp = a0 + a1 exr + e Where gdp-Gross Domestic Product exr -Exchange rate 0 and a1 -Parameters e -Error term MODEL II bot = b0 + b 1 exr + e Where bot-Balance of trade exr -Exchange rate b0 and b1 -Parameters e -Error term MODEL tercet exrev = c0 + c1 exr + e Where exrev-External reserve exr -Exchange rate c0 and c1-Parameters e -Error term MODEL IV cpi = d0 + d1 exr + e Where cpi -Consumer price Index exr -Exchange rate d0 and d1-Parameters e -Error term MODEL V gdp = e0 + e1 exr + e2 bot + e3 exrev + e4 cpi + e Where exr -Exchange rate bot-Balance of trade xrev-External reserve cpi -Consumer price Index e0, e1, e2, e3 and e4 -Parameters e -Error term 3. 6A PRIORI EXPECTATION Economic A Priori Criteria This refers to the sign and size of the arguings in economic relationships. MODEL I gdp = a0 + a1 exr + e It is expected that a0 0 and a1 O Exchange rate is the price of a currency in terms of another currency while gross domestic product is the value of the goods and services produced in a country within a specific period of time. Exchange rate is expected to affect the gross domestic product negatively.A h igh exchange rate would not allow for the importation of capital goods that are need for productive activity, thereby impair economic growth. This is based on neoclassical trade models. MODEL II bot = b0 + b1 exr + e It is expected that b0 0 and b1 O Balance of trade is the net difference between total export and import. The relationship between exchange rate and balance of trade is expected to be positive negative. This is because a high exchange rate would encourage exportation and discourage importation and thereby making the balance of trade favourable i. positive (when export is higher than import). MODEL III exrev = c0 + c1 exr + e It is expected that c0 0 and c1 0 External reserve is the amount of money which a country holds in foreign currency. It represents the savings of a nation. It is often accumulated from the proceeds from external trade. A high exchange rate would mean that a country would have to pay more to pay for the goods and services from other countries and as a result would not have much as external reserve. So the relationship between exchange rate and external reserve is expected to be negative.MODEL IV cpi = d0 + d1 exr + e It is expected that d0 0 and d1 O Consumer price index is a measure of the general price level in an economy and as such an indicator of the standard of living of the people. A high exchange rate would impair production causing the general price level to rise. Therefore, the relationship between exchange rate and consumer price level is expected to be direct i. e positive. MODEL V gdp = e0 + e1 exr + e2 bot + e3 exrev + e4 cpi + e Where exr -Exchange rate bot-Balance of trade exrev-External reserve cpi -Consumer price Index 0, e1, e2, e3 and e4 -Parameters e -Error term It is expected that e0 0, e1 0 e2 0 e3 0, e4 0 According to the neoclassical trade model, exchange rate is expected to affect the gross domestic product negatively. A high exchange rate would not allow for the importation of capital goods that are need for productive activity, thereby impair economic growth. Balance of trade represents the net trade. A favourable balance of trade (i. e net export) would increase the gross domestic product. So balance of trade would vary directly with the gross domestic product.The external reserve is also expected to have positive relationship with the external reserve. High external reserve would stabilize the foreign exchange market which therefore creates conducive environment for improved production and trade. Consumer price index is an indicator of the standard of living of the people. A high standard of living is expected to increase labour productivity and thereby stimulating growth. So consumer price index would vary directly with the gross domestic product. A high exchange rate would impair production causing the general price level to rise.Therefore, the relationship between exchange rate and consumer price level is expected to be direct i. e positive. STATISTICAL CRITERIA This aims at the evaluation of the statistical reliability of the estimates of the disceptations. In this line, the t-statistics will be employed to test the hypotheses concerning the reliable values of the population parameters a1, a2 and a3. The R2 Statistics is also employed as the coefficient for determination to measure the goodness of fit of the regression line to the observed samples values of the variable while the F-statistics will also be used to test the boilers suit significance of the regression.ECONOMETRIC CRITERIA It aims at detecting the violation or validity of the supposition of the econometric method employed (i. e. OLS). To test the validity of the assumption of non-correlated disturbances, the Durbin Watson Statistics would be used in the evaluation of the results of estimates. REFERENCES Koutsoyiannis A. (1991), Theory of Econometrics, Hampshire Macmillan Limited Ogede P. O. (1999), Undergraduate Econometrics, Lagos Minerib, Accord Limited Robert S. Pindyc k and Daniel L. Rubinfeld (1998), Econometric Models and Economic forecasts, Singapore Irwin McGraw-Hill. CHAPTER FOUR PRESENTATION AND synopsis OF DATA . 1INTRODUCTION The hypotheses were formulated with data spanning the period between 1980 and 2005. All the data for estimation were obtained from the publications of the Central Bank of Nigeria (CBN) and Federal Office of Statistics (FOS). The choice of statistics adopted in this chapter is the regression and analysis of variance. The variance of the estimate is obtained by multiplying the standard misplay with the square reciprocal of the derivative i. e variance. The traditional test of significance of the parameter estimates is the standard error test, which is equivalent to the students ttest.The correlation coefficient (r) shows the relationship between the variables. The relationship could be of a direct, indirect or an outright zip fastener correlation. The standard error is obtained by taking the inverse of the variance of the estimate. The standard errors for the estimate of a1, b1 etc. will be dealt with in this project. The standard error for the estimates a0 and b0 are left out. The F-Ratio is used to determine the overall significance of the regression models i. e. to determine the extent to which the variations in the dependent variable can be attributed to changes in the explanatory variables.This test shall be used to measure the extent of the claimed relationship between the exchange rate, gross domestic product, balance of trade, external reserve and consumer price. F-ratio would also be used to test for causality between the variables. The coefficient of determination (R2) is used to determine the overall significance of the model just like the F-ratio. A high coefficient of determination signifies that the regression model is statistically significant, meaning that there is high relationship between the dependent variables and the interdependent variables. 4. 2PRESENTATION OF REGRESSION RESULTSMODEL I gdp = a0 + a1 exr gdp = 81582. 54 + 445. 356ex t statistic (27. 07) (8. 573)a Std. Error (3013. 762) (51. 946)* F-Ratio -73. 503 R2-0. 762 R2-0. 751 D-W-0. 536 N-25 d. f-N K = 25 2 = 23 * Figures in parentheses are the standard errors a meaningful at 5%. Source Computed by Author from SPSS Regression Results MODEL II bot = b0 + b1 exr bot = -11771. 2 + 8652. 278 exr t statistic (-0. 129) (5. 491)a Std. Error (91420923) (1575. 762)* F-Ratio -30. 49 R2-0. 567 R2-0. 548 D-W-1. 298 N-25 d. f-N K = 25 2 = 23 * Figures in parentheses are the standard errors a Significant at 5%. Source Computed by Author from SPSS Regression Results MODEL III exrev = c0 + c1 exr exrev = -66440. 5 + 11080. 057exr t statistic (-1. 190) (11. 509)a Std. Error (55854. 58) (962. 729)* F-Ratio -132. 457 R2-0. 852 R2-0. 846 D-W-1. 608 N-25 d. f-N K = 25 2 = 23 * Figures in parentheses are the standard errors a Significant at 5%. Source Computed by Author from SPSS Regression Results MO DEL IV pi = d0 + d1 exr cpi = 313. 623 + 40. 736 exr t statistic (1. 69) (12. 737)a Std. Error (185. 548) (3. 198)* F-Ratio -162. 242 R2-0. 876 R2-0. 870 D-W-0. 727 N-25 d. f-N K = 25 2 = 23 * Figures in parentheses are the standard errors a Significant at 5%. Source Computed by Author from SPSS Regression Results MODEL V gdp = e0 + e1 exr + e2 bot + e3 exrev + e4 cpi gdp = 77374. 9 + 140. 6exr + 0. 007bot 0. 061exrev + 10. 28cpi t statistic(-0. 243) (-1. 364)a (1. 258)a (-0. 013)a (3. 19)a Std. Error (33. 074) (0. 23)* (0. 76)* (0. 000)* (0. 000)* F-Ratio -35. 732 R2-0. 877 R2-0. 853 D-W-1. 082 N-25 d. f-N K = 25 5 = 20 * Figures in parentheses are the standard errors a Significant at 5%. Source Computed by Author from SPSS Regression Results 4. 3INTERPRETATION AND ANALYSIS OF RESULTS MODEL I Going by the results of the regression, there is a positive relationship between exchange rate and the gross domestic product (GDP). But this result is not in consonance with the a pr iori expectation earlier stated. Since the standard error of the parameter estimate S. . (a1) 51. 946 is less than half of the parameter estimate (a1/2) 222. 678, we shall therefore fend the nothing meditation and demand the alternate(a) shot. This indicates that the parameter estimate is statistically significant. The theoretical t-value at 5% level of significance with twenty-three degree of independence is 1. 714. The theoretical t-value is less than the calculated t-value (8. 573) we shall therefore decline the null hypothesis and accept the option hypothesis. This implies that the parameter estimate (exchange rate) is statistically different from zero i. e. t is a relevant variable for the determination of the gross domestic product in Nigeria. The coefficient of determination gives 0. 762 or 76. 2% meaning that the regression model is 76. 2% significant i. e the variations in the dependent variable i. e. the gross domestic product is 76. 2% ascribable to the changes in the independent variable i. e exchange rate. This result confirms the significance of the exchange rate in the determination of the gross domestic product of Nigeria. The calculated F-value (73. 503) is less than the vital F-value at 5% level of significance with v1 = 1 and v2 = 23 (4. 8). We shall therefore go down the null hypothesis and accept the alternative hypothesis. This signifies that the overall regression or relationship between the gross domestic product and exchange rate is significant. This analysis revealed to us that exchange rate is a major determinant of the level of productivity in Nigeria. Besides, exchange rate was found to vary directly with the gross domestic product. MODEL II From the results of the second regression, it is evident that there is also positive relationship between the exchange rate and balance of trade.This relationship conforms with the a priori expectation. The standard error of the parameter estimate S. e. (b1) 1575. 762 is less than t he half of the parameter estimate (b1/2)4326. 139. We shall therefore spurn the null hypothesis and accept the alternative hypothesis. This indicates that the parameter estimate is statistically significant. The theoretical t-value at 5% level of significance with twenty-three degree of freedom is 1. 714. On comparing with the computed t-value, the critical t-value is less than the calculated t-value (5. 491).We shall therefore reject the null hypothesis and accept the alternative hypothesis meaning that the parameter estimate i. e exchange rate is statistically different from zero i. e. it affects the dependent variable balance of trade. In this model the coefficient of determination gives 0. 567 or about 57%. This shows that the regression model is 57% significant i. e the variation in the balance of trade is 57% attributable to the changes in the independent variable. The calculated F-value (30. 149) is less than the critical F-value at 5% level of significance with v1 = 1 and v2 = 23 (4. 28).We shall therefore reject the null hypothesis and accept the alternative hypothesis. This means that the overall regression or relationship between the exchange rate and the balance of trade is statistically significant i. e there is causality between the two variables. MODEL III The result of the third regression was not in consonance with what was expected. The results showed a positive relationship between the external reserve and the exchange rate. This could be attributed to import reduction strategy of the government over the years. For the standard error test, the standard error of the parameter estimate S. . (c1)962. 729 is less than the half of the parameter estimate (c1/2)5540. 02. We shall therefore reject the null hypothesis and accept the alternative hypothesis. This shows that the parameter estimate is statistically significant. The theoretical t-value at 5% level of significance with twenty-three degree of freedom is 1. 714. The theoretical t-value is less than the computed t-value 11. 509 so that we reject the null hypothesis and accept the alternative hypothesis implying that the parameter estimate (exchange rate) is statistically different from zero i. . it is a relevant variable for the determination of the external reserve of the country. The coefficient of determination shows 0. 852 or 85. 2% meaning that the regression model is about 85% significant i. e the variation in the dependent variable i. e. external reserve is 85% attributable to the changes in the independent variable i. e exchange rate. The computed F-value (132. 457) is greater than the critical F-value at 5% level of significance with v1 = 1 and v2 = 23 (4. 28). We shall therefore reject the null hypothesis and accept the alternative hypothesis.This signifies that the overall regression between the exchange rate and external reserve is also significant. MODEL IV Like the previous regression results, changes in the explanatory variable (exchange rate) in this m odel had positive effect on the consumer price index. This result is in consonance with the a priori expectation. The standard error of the parameter estimate S. e. (d1) 3. 198 s less than the half of the parameter estimate (d1/2)20. 368. We shall therefore reject the null hypothesis and accept the alternative hypothesis. This means that the parameter estimate exchange rate is statistically significant.From the t-table, the theoretical t-value at 5% level of significance with twenty-three degree of freedom is 1. 714. In respect of the parameter estimate exchange rate, the theoretical t-value is less than the calculated t-value (12. 737), we shall therefore reject the null hypothesis and accept the alternative hypothesis. This implies that the parameter estimate is statistically different from zero. The coefficient of determination (R2) gives 0. 876 or 87. 6% meaning that the regression model has a good fit i. e the variations in the dependent variable i. e. consumer price index is 85. % attributable to the changes in the independent variable i. e exchange rate. The theoretical F-value at 5% level of significance with v1 = 1 and v2 = 23 is 4. 28. Since the calculated F-value (162. 242) is greater than the critical value, we shall reject the null hypothesis and accept the alternative hypothesis. This signifies that the overall regression or relationship between the exchange rate and consumer price index is significant so, the changes in the consumer price index can to a certain extent, be attributed to changes in the explanatory variable exchange rate. MODEL VThe results of the last regression that examined the relationship between the gross domestic, exchange rate, balance of trade, external reserve and consumer price index shows that there is positive relationship between the gross domestic product and the explanatory variables except the external reserve. Also, the standard errors of all the parameter estimates are less than the half of the parameter estim ates. We shall therefore reject the null hypothesis and accept the alternative hypothesis. This shows that the parameter estimates exchange rate, balance of trade, external reserve and consumer price index are all statistically significant.This means that they are important factors that affect the value of the gross domesti