A Vector Autoregression Analysis of the Efficacy of External Reserves Management on Exchange Rate Stability: Evidence from Nigeria

Abstract

This paper investigates the dynamic relationship between exchange rate variations and international reserves in Nigeria. The study aimed at ascertaining whether a lead-lag relationship exists between both phenomena using monthly time series data on the bureau de change exchange rate and international reserves extracted from the statistical bulletin of the Central Bank covering 108 observations between January 2010 and December 2018. The econometric techniques utilized included the Granger causality based on the vector error correction mechanism and the AR inverse root test for stability and reliability. The empirical result indicates the absence of causality between exchange rate volatility and international reserves fluctuations for Nigeria. Based on our empirical result, the study vehemently concluded that monetary authorities do not have to depend on external reserves management as an efficient strategy to stabilizing the value of the Nigerian currency. Thus, external reserves accumulation could be a face lifting parameter for credit ratings and attraction of needed capital to stimulate the much desired economic growth in Nigeria.