EXCHANGE RATE VOLATILITY AND FOREIGN CAPITAL INFLOW NEXUS: EVIDENCE FROM NIGERIA

Abstract

Foreign Capital Inflow remains a significant factor in the development of any nation’s economy. But what is the nature of the relationship between the volatility in the exchange rate and foreign capital inflow? This paper examines the effect of this relationship on foreign direct investment in Nigeria between the period 1981 and 2010. In order to achieve its overall goal the study has utilized co-integration and error correction modeling approach. The unit root tests show that the variables are integrated of order one while the Johansen co-integration result showed that the variables are co-integrated. The regression estimates show that exchange rate volatility has significant positive impact on foreign direct investment in the long run while in the short run it has an insignificant-negative effect on foreign direct investment in Nigeria. The study concludes that exchange rate volatility has differential impact on foreign direct investment in the long run and in the short run.