Effect of Currency Devaluation on Macro-Economic Variables: The Nigerian Experience

Abstract

This paper investigates past exchange rate management regimes adopted by the Central Bank of Nigeria since 1959, and attempts to find out whether devaluation can be used to restore equilibrium and significantly achieve national economic growth and development. The Multiple Least Squares method was used to estimate coefficients of the identified relationships following one period lag and autoregressive models formulated to correct errors detected in the data of macroeconomic variables. Significantly, a negative and statistically significant relationship was found between exchange rate and non-oil exports. Devaluation had a negative cause-effect relationship with inflation. It was also negative and significant with national output in the one-year lag specification. Accordingly the paper recommends that devaluation should not be relied upon as a primary tool for restoration of macroeconomic balance. Instead, a system of managed float supported with strong trade and exchange controls should be used. Complementary fiscal policy measures should also be adopted.