EFFECT OF INTEREST RATE ON EXCHANGE RATE MANAGEMENT IN NIGERIA
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ABSTRACT
Despite the fact that in Nigeria Monetary Policy (Interest rate policy) has been a policy tool for managing the exchange rate, Nigeria has continued to witness depreciating value of its domestic currency in recent times. This cannot be disconnected to the fact that the monetary policy has proved ineffective in managing exchange rate over the period under study. Thus, this study buttress other factors which can possibly enhance the interest rate defense of a currency in Nigeria. These factors; level of capital account openness, and level of corporate debt have not been given emphasis in the literature in terms of studies conducted using Nigerian data on how the exchange rate in Nigeria can be effectively managed or defended using Nigerian data. Therefore, this study examines the effect of interest rate on exchange rate management in Nigeria in the context of capital account liberalisation and corporate debt level. In doing so, this study utilized annual time series data sourced from CBN and WDI from 1981 to 2015 to estimate a Vector Error Correction Model (VECM). The long-run findings show appreciation of the domestic currency, implying that high level of corporate debt and capital account openness alone are notenough to induce capital outflows and hence, depreciate the domestic currency as interest rate rises. However in the short-run increase in interest rate induces depreciation of the domestic currency even though less if the capital account is liberalised and also more if there is high level of corporate debt. Therefore, sequel to the findings of this studyit is recommended that,interest rate policies that aim at increasing the value of the domestic currency must focus on liberalising the capital account as well as ensuring lower leverage ratio (low debt level) in the corporate sector while interest rate is increased to attract investors.
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