Remittances, Exchange Rates Dynamics and Economic Growth in Nigeria

Abstract

This study examines the dynamic relationship among remittances, exchange rate and economic growth in Nigeria between 1980 and 2022. This is driven by the conflicting empirical evidence on the impact of remittances and exchange rate movements on growth, and the limited research addressing these variables in an integrated macroeconomic model. To overcome these challenges, this study uses a Vector Error Correction Model (VECM) with Johansen cointegration tests, impulse response functions, and variance decomposition analysis. Findings reveal the presence of three long-run cointegrating relationships, suggesting a stable macroeconomic relationship. The study finds remittances negatively affect economic growth in the short-run but are insignificant in the long-run. The exchange rate shows an initial negative effect on growth but turns positive in the long run, suggesting adjustment in international competitiveness. Public spending has a positive impact on growth in the short term but a negative impact in the long term, possibly due to crowdingout. Inflation has a negative impact on growth while investment has a positive impact. The study shows that the stability of the macroeconomic environment and the effective use of external inflows are important for growth. It suggests policies to stabilise exchange rates, control inflation, increase the efficiency of government expenditure, and ensure remittances are used in an investment-friendly manner. The research contributes to the existing knowledge by offering a multifaceted empirical investigation which resolves contradictory findings and illustrates the dynamic channels of transmission among remittances, exchange rates and growth using the case study of Nigeria. Keywords: Remittances, Exchange Rate, Economic Growth, Macroeconomic Stability, Inflations