Vector Autoregression (VAR) Analysis of the Nexus between Exchange Rate Volatility and Private Domestic Consumption in Nigeria (Published)
This paper models the empirical relationship between exchange rate variations and private domestic consumption in Nigeria using vector auto regression (VAR) method. In addition to exchange rate, household disposable income and recurrent expenditure were introduced in the model as part of the explanatory variables. The study sample spanned from 1990 to 2016 and the data on each of the variables were sourced from the Central Bank of Nigeria Statistical Bulletin. The unit root test results indicate that all the variables are difference stationary with all I(1) order. Additionally, the test for cointegration reveals that variables have long run relationship as evidenced in the outcomes of the trace and maximum eigenvalue tests. This provides basis for rejecting the null hypothesis of no cointegration. The estimated VAR model reveals that exchange rate lagged for one period has significant negative effect on private domestic consumption. 1 percent increase in exchange rate, on the average, increases private domestic consumption by 1.733 percent. The dynamic effects of disposable on private consumption are mixed. From the VAR estimates, lag 2 of disposable income negatively influenced private consumption whereas lag 3 is positively linked to private domestic consumption. Additionally, public recurrent expenditure lagged for 3 periods has significant positive effect on private domestic consumption. This paper, therefore, concludes that increase in the exchange rate is associated with increasing level of private domestic consumption. Owing to the findings, it is recommended that the CBN should ensure that effective exchange rate management system is put in place to maintain a stable rate of exchange and provide pathway for rapid and sustained increase in private domestic consumption.