Currency Substitution and Exchange Rate Volatility in Nigeria: an Autoregressive Distributed Lag Approach

Authors

Isaiah O. Ajibola, Central Bank of Nigeria
Sylvanus U. Udoette, Central Bank of Nigeria
Rabia A. Muhammad, Central Bank of Nigeria
John O. Anigwe, Central Bank of Nigeria

Keywords

Autoregressive distributed lag, currency substitution, exchange rate

Abstract

This study investigates the relationship between exchange rate volatility and currency substitution in Nigeria, using Autoregressive Distributed Lag (ARDL) model. After accounting for the presence of structural breaks, evidence from the findings shows that domestic interest rate and expected changes in exchange rate are important determinants of currency substitution. In addition, there is empirical support for a positive relationship between exchange rate volatility and currency substitution both in the short- and long-run. This implies that higher real exchange rate volatility is associated with an increased level of currency substitution. In view of these findings, the paper calls for sustained efforts by the monetary authority in containing exchange rate volatility and inflation as a way of curbing the spate of currency substitution in the country

Author Bio

The authors are staff of Statistics Department, Central Bank of Nigeria

Publication Title

CBN Journal of Applied Statistics

Issue

2

Volume

11

First Page

1

Last Page

28

Recommended Citation

Ajibola, Isaiah O.; Udoette, Sylvanus U.; Muhammad, Rabia A.; and Anigwe, John O. (2020) "Currency Substitution and Exchange Rate Volatility in Nigeria: an Autoregressive Distributed Lag Approach," CBN Journal of Applied Statistics (JAS): Vol. 12: No. 1, Article 8.
Available at: https://dc.cbn.gov.ng/jas/vol12/iss1/8