Dollarization and Foreign Exchange Rate Volatility in Nigeria: The Role of Institutional Quality
Keywords:
Dollarization, Exchange rate volatility, Currency Exposure, Inflation
Abstract
The study examined the nexus between dollarization and exchange rate volatility with the role of institutional quality for the period 1981 to 2021. The Granger Causality Approach was used to forecast the relationship between the variables. The Findings showed a unidirectional causality from cross border currency exposure to increase in dollarization which in turn influences exchange rate volatility and exacts inflationary pressure in Nigeria. The study, also showed that; control of corruption through improved institutional quality is capable of reducing dollarization and eventually reduces the volatility of the Naira exchange rate. The government should deploy technology, offer incentives and use other control measures to clamp down on the dollarization trend in the country.
References
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29 McKinnon, R. I. (1985). Two concepts of international dollarization. In M. Connolly & J. McDermott (Eds.), The economics of the Caribbean Basin. New York: Praeger.
30 McKinnon, R. I. (1993). The rules of the game: International money in historical perspective. Journal of Economic Literature, 3(1), 1–44.
31 Opuala - Charles, S. and Orji, J. (2022). Foreign Exchange Management and Selected Macroeconomic Performance nexus: Evidence from Nigeria. DiamondBridge Economics and Business Journal 2 (3), 4. https://doi.org/10.60089/dbebj.2022.2.3.3.
32 Opuala-Charles, S., & Orji, J. O. (2023). Supply Side Liberalization and Foreign Exchange Management in Nigeria. Journal of Economics & Management Research. SRC/JESMR-206. Journal of Economics Management Research, 4(1), 2-7. https://doi.org/10.47363/JESMR/2023(4)171
33 Perpetua, O. I. (2014). Impact of exchange rate variation and inflation on the economic growth of Nigeria: An empirical approach. Research Journal of Finance and Accounting, 5(22), 166-176.
34 Reinhart, C. M., Rogoff, K. S., & Savastano, M. (2003). Addicted to dollars.
35 Rennhack, R., & Nozaki, M. (2006). Financial dollarization in latin america. In Financial Dollarization: The Policy Agenda (pp. 64-96). London: Palgrave Macmillan UK.
36 Webber, A. G. (1999). Dynamic and Long Run Responses of Import Prices to the Exchange Rate in the Asia-Pacific. Asian Economic Journal, 13(3), 303–320. https://doi:10.1111/1467-8381.00087
37 Willett, T. D., & Banaian, K. (1996). Currency substitution, seigniorage and the choice of currency policies. In P. Mizen & J. Pentecost (Eds.), The macroeconomics of international currencies: Theory, policy and evidence. USA: Edward Elgar Publishing Ltd
38 Yinusa, D. O. (2008). Between dollarization and exchange rate volatility: Nigeria's portfolio diversification option. Journal of Policy Modeling, 30(5), 811-826.
39 Yinusa, D. O. and Akinlo, A. E. (2008). Exchange Rate Volatility and the Extent of Currency Substitution in Nigeria, Indian Economic Review, New Series, (43) 2, 161 – 181.
2 David, O. and Kehinde, T. (2015). CBN Journal of Applied Statistics 6 (1).
3 Egom, P.A. (2006). Resource Control: Problem and Solution.
4 Ghalayini, L. (2015). The Impact of Dollarization on the Efficiency of Monetary in Lebanon. Interaction between Dollarization and Inflation. Middle Eastern Finance and Economics Issue 14(2)
5 Aslanidi, O. (2008). Dollarization in Transition Economies: New Evidence from Georgia. Working Paper Center for Economic and Graduate Education of Sciences of the Czech Republic Economic Institute, 1-25
6 Calvo, G. and Vergh, C. (2006). From Currency Substitution under to Dollarization. Analytical and Policy Issues, in Calvo G. ed., Money, Exchange Rates and Output, MIT Press, 153-175.
7 Kessy, P. (2011). Dollarization in Tanzania: empirical evidence and cross-country experience, International Growth Center Working Paper 11/ 0251, Washington: International Monetary Fund,
8 Kokenyne, A. and Ley, J. and Veryune, R. (2010). IMF Working Paper 10/188 International Monetary Fund, Washington.
9 Mecagni, M., and Corrales, J.S (2015). Dollarization in Sub-Saharan Africa: experience and lessons, International Monetary Fund, Washington.
10 Olalekan, Y., (2009). Macroeconomic Fluctuations and Deposit Dollarization in Sub-Saharan Africa: evidence from panel data”, MPRA Paper 16259, Munich Personal RePec Archive, Munich.
11 Ajide, K. B., Raheem, I. D., & Asongu, S. A. (2019). Dollarization and the “Unbundling” of Globalization in sub-Saharan Africa. Research in International Business and Finance, 47, 398-409.
12 Akaike, H. (1974). A new look at the statistical model identification. IEEE Trans. Autom. Control 19, 716-723.
13 Bărbuță-Mișu, N., Güleç, T. C., Duramaz, S., & Virlanuta, F. O. (2020). Determinants of dollarization of savings in the Turkish economy. Sustainability, 12(15), 6141.
14 Bawa, S., Omotosho, B. and Doguwa, S. (2015). Ratchet Effects in Currency Substitution: An Application to Nigeria. CBN Journal of Applied Statistics 6 (2), 9.
15 Beaugrand, M. P. (2003). Overshooting and Dollarization in the Democratic Republic of the Congo. International Monetary Fund.
16 BEYBUR, M. (2022). The Relationship Between the Deposit Dollarization in Turkish Banking Sector with USD/TRY Exchange Rate and Consumer Confidence Index: 2012: 01–2022: 01. Kastamonu Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 24(1), 86-99.
17 Bofinger, P. (1991). The transition to convertibility in Eastern Europe: A monetary view. In J. Willianson (Ed.), Currency convertibility in Eastern Europe. Washington, DC: Institute for International Economics.
18 Branson, W. H., & Henderson, D. W. (1985). The specification and influence of asset markets. In R. W. Jones & P. B. Kenen (Eds.), Handbook of international finance (International monetary economics and finance) (Vol. 2). Amsterdam: Elsevier.
19 Carranza, L., Galdon-Sanchez, J. E., & Gomez-Biscarri, J. (2009). Exchange rate and inflation dynamics in dollarized economies. Journal of Development Economics, 89(1), 98-108.
20 De Nicolo, M. G., Ize, M. A., & Honohan, M. P. (2003). Dollarization of the banking system: good or bad?. International monetary fund.
21 Diebold, X. F. (2001). Elements of Forecasting. NY: South Western Publishing,254 Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and CrossSpectral Methods, Econometrica, 424–4.
22 Doguwa, S. I. (2014). Currency Substitution: Evidence from Nigeria. CBN Journal of Applied Statistics, (5)2, 1 – 23.
23 Dornbusch, R. (1976). Expectations and exchange rate dynamics. Journal of Political Economy, 84, 1161–1176.
24 Elkhafif, M. A. T. (2002). Exchange Rate Policy and Currency Substitution: The Case of Africa’s Emerging Economies, African Development Bank Economic Research Papers No. 71.
25 Frenkel, J. A. (1976). A monetary approach to the exchange rate: Doctrinal aspects and empirical evidence. Scandinavian Journal of Economics, 78, 200–224.
26 Gujarati, D.N. (2013). Basic Econometrics. (5th edn), NY: McGraw-Hill Companies.
27 Kendal, M.G., and Stuart, A. (1961). The Advance c Theory of Statistics, NY: Charles Griffin Publishers.
28 Koop, G. (2000). Analysis of Economic Data, New York: John Wiley & Sons, 175.
29 McKinnon, R. I. (1985). Two concepts of international dollarization. In M. Connolly & J. McDermott (Eds.), The economics of the Caribbean Basin. New York: Praeger.
30 McKinnon, R. I. (1993). The rules of the game: International money in historical perspective. Journal of Economic Literature, 3(1), 1–44.
31 Opuala - Charles, S. and Orji, J. (2022). Foreign Exchange Management and Selected Macroeconomic Performance nexus: Evidence from Nigeria. DiamondBridge Economics and Business Journal 2 (3), 4. https://doi.org/10.60089/dbebj.2022.2.3.3.
32 Opuala-Charles, S., & Orji, J. O. (2023). Supply Side Liberalization and Foreign Exchange Management in Nigeria. Journal of Economics & Management Research. SRC/JESMR-206. Journal of Economics Management Research, 4(1), 2-7. https://doi.org/10.47363/JESMR/2023(4)171
33 Perpetua, O. I. (2014). Impact of exchange rate variation and inflation on the economic growth of Nigeria: An empirical approach. Research Journal of Finance and Accounting, 5(22), 166-176.
34 Reinhart, C. M., Rogoff, K. S., & Savastano, M. (2003). Addicted to dollars.
35 Rennhack, R., & Nozaki, M. (2006). Financial dollarization in latin america. In Financial Dollarization: The Policy Agenda (pp. 64-96). London: Palgrave Macmillan UK.
36 Webber, A. G. (1999). Dynamic and Long Run Responses of Import Prices to the Exchange Rate in the Asia-Pacific. Asian Economic Journal, 13(3), 303–320. https://doi:10.1111/1467-8381.00087
37 Willett, T. D., & Banaian, K. (1996). Currency substitution, seigniorage and the choice of currency policies. In P. Mizen & J. Pentecost (Eds.), The macroeconomics of international currencies: Theory, policy and evidence. USA: Edward Elgar Publishing Ltd
38 Yinusa, D. O. (2008). Between dollarization and exchange rate volatility: Nigeria's portfolio diversification option. Journal of Policy Modeling, 30(5), 811-826.
39 Yinusa, D. O. and Akinlo, A. E. (2008). Exchange Rate Volatility and the Extent of Currency Substitution in Nigeria, Indian Economic Review, New Series, (43) 2, 161 – 181.
Published
2023-10-24
How to Cite
Silva Opuala-Charles, & Jonah Orji. (2023). Dollarization and Foreign Exchange Rate Volatility in Nigeria: The Role of Institutional Quality. International Journal on Economics, Finance and Sustainable Development, 5(10), 96-111. https://doi.org/10.31149/ijefsd.v5i10.4889
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