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Causal Relationship among Foreign Reserves, Exchange Rate and Foreign Direct Investment: Evidence from Nigeria

Author

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  • Augustine C. Osigwe

    (Department of Economics and Development Studies, Federal University, Ndufu-Alike, Ikwo, Nigeria)

  • Maria Chinecherem Uzonwann

    (Department of Economics, Nnamdi Azikiwe University, Awka, Nigeria.)

Abstract

This study scrutinized the Granger causality of foreign reserves, exchange rate (EXR) and foreign direct investment (FDI) in Nigeria. The results of the augmented Dicky Fuller and Philip Perron unit root test for stationary of the variables showed that all the variables were non-stationary at levels, but become stationary after first differences. The Johansen co-integration test revealed long-run relationship among the variables. The results of the Granger causality test indicated unidirectional causality from EXR to foreign reserves. Consistently from lag one to lag two; unidirectional causality existed from FDI to foreign reserves. At lag three, bidirectional causality was discovered between foreign reserves and FDI. Evidence of unidirectional causality running from EXR to FDI in lags one and three, was revealed. No causality existed between the duos at lag two. Based on the findings it is recommended that the policy makers establish the optimum EXR level that positively promotes foreign reserves and FDI.

Suggested Citation

  • Augustine C. Osigwe & Maria Chinecherem Uzonwann, 2015. "Causal Relationship among Foreign Reserves, Exchange Rate and Foreign Direct Investment: Evidence from Nigeria," International Journal of Economics and Financial Issues, Econjournals, vol. 5(4), pages 884-888.
    • Handle: RePEc:eco:journ1:2015-04-06
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    References listed on IDEAS

    as
    1. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-514, June.
    2. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
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    1. BOURENANE, Bouzid & REZIG, Kamel & DJORFI, Zakaria, 2022. "Measuring the effect of foreign exchange reserves on foreign direct investment in Algeria during the period 1990-2020 using the ARDL model," MPRA Paper 114990, University Library of Munich, Germany, revised 11 Apr 2022.
    2. James Ike Ugwu & Sergius Nwannebuike Udeh, 2018. "Influence of Foreign Direct Investment on Exchange Rate and Domestic Investment in Pre- and Post- IFRS Adoption Periods of Selected SubSaharan African Countries (1999-2015)," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 8(3), pages 1-16, July.
    3. Awoderu, Babalola Kayode & Abu, Orefi & Asogwa, Benjamin Chijioke, 2022. "Econometric Analysis of Agricultural Raw Material Exports, Exchange Rate and External Reserves in Nigeria," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 10(1), January.
    4. Rachna Agrawal & Ashima Verma, 2023. "Investigating the efficiency of foreign exchange reserves using stochastic frontier analysis: Evidence across the globe," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1376-1390, April.

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    More about this item

    Keywords

    Foreign Reserves; Exchange Rate; Foreign Direct Investment;
    All these keywords.

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F0 - International Economics - - General

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