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Economic and Financial Review

Publisher

Central Bank of Nigeria

Keywords

Real effective exchange rate, Nominal effective exchange rate, NEER, REER

Abstract

The exchange rate is a useful macroeconomic indicator which aid policy makers to take informed actions to stimulate or sustain the economy on a long run growth path. Thus, several exchange rate indices (bilateral nominal/real exchange rate, nominal effective exchange rate, real effective exchange rate, purchasing power parity, etc) are computed for different policy information. This paper computed Nigeria's real and nominal effective exchange rate (REER and NEER) indices using a pool of high frequency monthly data for the period 1996-2007. The paper observed that the REER index appreciated most of the period due to inflationary pressures in Nigeria, implying a loss in Nigeria's competitiveness relative to its major trading partners. The conclusion was that the naira was overvalued in real terms. The NEER also appreciated during the review period against the currency indices of the major trading partners, indicating a stronger naira. The paper advocated a basket approach to naira nominal exchange rate determination in which the relative macroeconomic developments in major trading partner economies are factored into the market exchange rate of the naira. A major shortcoming of the present study is that sub-regional effects of Nigeria's trade with its neighbours were not factored into the computations due to dearth of data. Current data indicate low level trade between Nigeria and its neighbours and other African countries.

Author Bio

M. K. Tule is an Assistant Director in the Monetary Policy Department of the Central Bank of Nigeria, while O. O. Duke (Mrs.) is a Principal Economist in the Research and Statistics Department of the Bank.

Publication Title

CBN Economic and Financial Review

Issue

1

Volume

45

Recommended Citation

Tule, M. K. & Duke, O. O. (2007). Computation of Nigeria's real effective exchange rate indices. CBN Economic and Financial Review, 45(1), 1-33.

Included in

Economics Commons

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