Accumulation of External Reserves and Effects on Exchange Rates and Inflation in Nigeria

Abstract

The study is to find out the effects of holding Foreign Exchange reserves on Exchange Rates in Nigeria. It is also to find out the effect of such reserves on inflation in Nigeria. Two hypotheses are proposed for the study. Hypothesis I has Null (H0) Hypothesis that foreign exchange reserves do not have significant effect on foreign exchange rate. There is the Hypothesis II where Null (H0) hypothesis is that foreign exchange reserves do not have significant effects on inflation in Nigeria. Secondary time series data are collated from CBN Statistical Bulletin. Simple linear regression was run for two models with Minitab 14 for windows. The regression equation shows that there is a negative relationship between Foreign Exchange rate leading to the rejection of first null hypothesis and accepting H1. The Second regression equation shows that inflation has positive relationship with foreign reserves. This means also rejecting second null hypothesis and accepting the second alternative hypothesis. Government is advised to ensure optimal management of the nations external reserves. Other causes such as Money Supply (M2) are suspected to be responsible for causing inflation in Nigeria.
Key words: Foreign reserves; Foreign exchange; Balance of payments; Volatility; Guidotti–Greenspan rule; External shocks