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Exchange Rate Instability, Stock Market Development And Nigeria’s Capital Account Balance

Exchange Rate Instability, Stock Market Development And Nigeria’s Capital Account Balance

 

Abstract: The paper empirically examined the impact of instability in exchange rate, stock market development and a battery of other control variables on the capital account component of Nigeria’s balance of payment. Data used covered the period 1970-2013. The empirical methodology entailed using co-integration and error-correction modelling techniques to estimate the parameters of the multivariate single-equation model that was specified. The control variables used include inflation rate, level of domestic output proxied by the country’s GDP, the country’s debt to income ratio and the differential between domestic and foreign interest rates, a measure of relative rate of return. The empirical results show that instability in exchange rate, stock market development, inflation rate and output levels are germane to explaining capital account balance. Specifically, the study found the effects of exchange rate instability, domestic output, debt income ratio and interest rate differential to be negative and significant although at different levels. The effects of inflation rate and stock market development were positive and significant.

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