Nwaeze et al
Greener Journal of Economics and Accountancy Vol. 6 (3), pp. 082-095, November 2017
ISSN: 2354-2357 © 2017 Greener Journals
Manuscript Number: 112017170
Exchange Rate Volatility and Fiscal Deficit in Nigeria: Any Causality? (1970-2016)
*1Nwaeze Nnamdi Chinwendu, 2Kalu Ijeoma Eme,
3Tamuno Steve Otonye
1Dept. of Economics, University of Port Harcourt.
2Dept. of Economics, University of Port Harcourt.
3Department of Economics, University of Port Harcourt.
This study investigated possible causal relationships between fiscal deficit and exchange rate in Nigeria. The study adopted the vector autoregression (VAR) econometric technique to analyze the time series data obtained from the Central Bank of Nigeria and other sources. The study amongst other findings, found long run relationship between exchange rate and fiscal deficit, irrespective of how the deficit is financed. The study also found joint causality running from fiscal deficit to exchange rate with feedback. Also joint causality was found running from exchange rate to both the size of deficit finance through domestic and external borrowings, but without any feedback. Consequently, the variation in exchange rate are chiefly from both overall fiscal deficit financed through external and domestic borrowings. The study concluded that, fiscal deficit irrespective of how it is financed has significant negative effect on exchange rate in Nigeria and has contributed in worsening exchange rate volatility in Nigeria. The study recommends that the fiscal deficit should be scarcely deployed and moderated as a fiscal policy tool, as this causes shock and instability in price levels in general and exchange rate in particular.
Keywords: Exchange rate, volatility, causation, fiscal deficit and aggregate demand.
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