Interactive Effects of Exchange Rate and Inflation on External Reserves in Nigeria

This study investigates the interactive effects of exchange rate and inflation rate on Nigeria’s external reserves. Time series data from 1992-2024 were analyzed using diagnostic checks and the Augmented Dickey-Fuller (ADF) unit root test to ascertain the stationarity properties of the variables. Johansen cointegration analysis and the Error Correction Model (ECM) were employed to examine both the long-run and short-run dynamics of the relationship among exchange rate, inflation, and external reserves. The results showed that the variables were stationary at first order (1(1) and had one co-integrating equation 1(1).The findings reveal that exchange rate depreciation and rising inflation exert significant negative effects on external reserves in both the short and long run. Based on these results, the study recommends among others diversification of foreign exchange sources, with a stronger focus on non-oil exports, tourism, and remittances to reduce dependence on crude oil earnings.