Capital Inflows and Exchange Rate in Nigeria

Abstract

This study examined the causal nexus between capital inflows (foreign direct investment and foreign portfolio investment) and exchange rate in Nigeria. It also examined the impact of these capital inflows on exchange rate in Nigeria for the period spanning 1986 to 2011. The study employed both granger causality and error correction modelling techniques. The causality estimates showed no causal link between capital inflows (foreign direct investment and foreign portfolio investment) and exchange rate within this period. The long run regression estimate revealed that foreign direct investment had negative effect on exchange rate while portfolio investment had positive impact on exchange rate. However, the magnitude of the impacts was very minute unlike the international oil price which had a strong negative effect on the exchange rate. The result of the short run result was similar to the causality result, indicating that neither foreign direct investment nor foreign portfolio investment had significant impact on exchange rate. The study concluded that the relationship between capital inflows and exchange rate in Nigeria is a long run phenomenon.

DOI: 10.5901/mjss.2014.v5n7p263