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EMPIRICAL ANALYSIS OF THE EFFECT OF EXCHANGE RATE VOLATILITY AND CAPITAL INFLOWS ON ECONOMIC GROWTH IN NIGERIA (1970 – 2013)
Abstract
This study examines the effects of exchange rate volatility and capital inflows on the economic growth (GDP) in Nigeria between 1970 and 2013. The study used FDI and remittance which proved to be most vital components of Foreign Capital inflow to Nigeria currently as demonstrated by various literature to proxy capital inflow. The result of our Generalised Method of Moments (GMM) estimator shows that F0reign Direct Investment (FDI), Capital, Financial Development (FD) had significant positive effects on Gross Domestic Product (GDP) while Remittance, the lag value of Exchange Rate Volatility ( ), Financial liberalisation (FL) and Labour force had significant negative effect on GDP. On the other hand, Exchange Rate volatility (EXRV) has positive but insignificant effect on GDP. This study therefore enjoined the present administration in Nigeria to provide enabling financial and infrastructural environment that will attract the inflow of FDI to agric sector, solid minerals and agro allied industry which the government intends to use as vocal points to diversify the economy from present dependence on failing oil revenue. Equally economic policy that will encourage more of the remittances inflow to Nigeria to productive investment rather than consumption which has no positive impact on economy should be enthreshed into Nigeria financial policy. Finally, more financial reforms that will not only improve financial inclusion especially at the rural sector but that will also remove totally the negative effect of EXRV on economic growth should be introduced into Nigerian financial system.
Keywords: Exchange rate volatility, Capital inflows, Economic growth, Saving- Investment gap, General Method of Moment and Nigeria