The Relationship between Foreign Direct Investment, Exchange Rate, and Broad Money Growth: The case of Nigeria

The thesis investigates the long-run equilibrium relationship between foreign direct investment, exchange rate, and broad money growth in the case of Nigeria with the use of data sourced from the World Bank Development Indicators from 1970 to 2016. The thesis applies the two unit root tests namely Augmented Dickey-Fuller and Phillips–Perron in order to test the stationarity of the variables with Kwiatkowski– Phillips–Schmidt–Shin stationarity test as a confirmatory test. Vector autoregressive model (VAR) is applied along with Johansen cointegration test and vector error correction model (VECM) with the aim of estimating the long-run coefficients and determining the existence of a long-run association between the variables. Granger causality test is further applied to determine the directions of the variables and lastly, Impulse Response Function and Variance Decomposition are applied to see the variables’ response to an exogenous shock. The results indicate a positive long-run relationship between FDI and broad money growth as well as a negative long-run relationship between exchange rate and broad money growth in Nigeria. The thesis recommends policymakers to adopt a suitable exchange rate regime other than the floating or flexible regime, target inflation with monetary policy and narrow down the gap that exists between inter-bank and parallel market foreign exchange rate. Furthermore, local production, as well as exports, need to be boosted and imports should be reduced by levying more tax on luxury imports. There should also be a provision of foreign exchange futures for investors in order to stimulate foreign investment.