Do FDI Inflows Encourage Domestic Currency Appreciation in Nigeria? Revisiting the Aliber’s Theory

Using annual series that span the period from1981-2022 and employing the ARDL framework, this study examines if FDI inflows lead to domestic currency appreciation in Nigeria. Finding indicates that in the short-run and the long-run, FDI inflows impacted negatively and significantly on exchange rate. Also, one period lag of interest rate impacted positively on exchange rate in the short-run but in the long-run the impact was negative. Net barter terms of trade also impacted exchange rate positively. The significant impact of FDI inflows on exchange rate provides an alternative view of the link between the two variables different from the postulation of Aliber’s hypothesis. Consequently, policymakers should weigh the benefits and costs of FDI inflows bearing in mind that continuous appreciation of the domestic currency occasioned by FDI inflows could adversely affect the terms of trade position.