Causal Relationship among Foreign Reserves, Exchange Rate and Foreign Direct Investment: Evidence From Nigeria

Abstract

This study scrutinized the Granger causality of foreign reserves, exchange rate (EXR) and foreign direct investment (FDI) in Nigeria. The results of the augmented Dicky–Fuller and Philip–Perron unit root test for stationary of the variables showed that all the variables were non-stationary at levels, but become stationary after first differences. The Johansen co-integration test revealed long-run relationship among the variables. The results of the Granger causality test indicated unidirectional causality from EXR to foreign reserves. Consistently from lag one to lag two; unidirectional causality existed from FDI to foreign reserves. At lag three, bidirectional causality was discovered between foreign reserves and FDI. Evidence of unidirectional causality running from EXR to FDI in lags one and three, was revealed. No causality existed between the duos at lag two. Based on the findings it is recommended that the policy makers establish the optimum EXR level that positively promotes foreign reserves and FDI.

Keywords

• foreign reserves
• exchange rate
• foreign direct investment