The Asymmetric Influence of Exchange Rate and Inflation on Financial Development in Nigeria: Evidence from NARDL

Authors

1 Faculty of Business and Management, Universiti Sultan Zainal Abidin Malaysia, Terengganu, Malaysia

2 Faculty of Maritime Study, Universiti Malaysia Terengganu, Terengganu, Malaysia

3 Department of Economics and Development Studies, Faculty of Arts and Social Sciences, Federal University Dutse Nigeria, Dutse, Nigeria

4 Department of Economics, Faculty of Social and Management Sciences, Bayero University, Kano, Nigeria

Abstract

This paper examined the asymmetric effects of exchange rate, and inflation on financial development growth using a model enhanced with oil prices asymmetry to apprise model specification. The research question that has been used implies, do the changes in their asymmetry significantly influence financial development? We employed nonlinear auto-regressive distributive lag (NARDL). In addition, we used the monthly data from 1980M01 to 2018M12. We found a long-term negative shock in exchange rate, both short run positive shock and negative shocks, respectively, declining the financial development. Additionally, the long run negative oil price shock and its long-term positive shocks stimulate and decline financial development, respectively. Regarding inflation, its positive and negative shocks in long run, respectively, reduce financial development. While in the short run the negative and positive shock in inflation increase and decline the financial development respectively. Accordingly, the results demonstrate a stable and sustainable inflation and exchange rate environment that would negatively cause financial development to stabilize the oil price and enhance the robust financial system. Therefore, successful policies that promote low inflation and exchange rates, overhaul of reliably improved financial institutions, capital accumulation, and efficient resources mobilization should be put in place for positive financial development to occur.

Keywords

References

Ahmad, A. U., Abdullah, A., Abdullahi, A. T., & Muhammad, U. A. A. (2015a). Stock Market Returns and Macroeconomic Variables in Nigeria: Testing for Dynamic Linkages with A Structural Break. Scholars Journal of Economics, Business and Management, 2(8A), 816-28.
Ahmad, A. U., Abdullah, A., Sulong, Z., & Abdullahi, A. T. (2015b). Causal Relationship Between Stock Market Returns and Macroeconomic Variables in Nigeria. IOSR Journal of Humanities and Social Science, 20(5), 74-96.
Ahmad, A. U., Abdallah, A., Sulong, Z., & Abdullahi, A. T. (2015c). An Autoregressive Distributive Lag for The Analysis of Macroeconomic Variables on Stock Market Returns in Nigeria. Advances in Environmental Biology, 1, 481-502.
Ahmad, A. U., Loganathan, N., Streimikiene, D., & Hassan, A. A. G. (2018). Financial Instability, Trade Openness and Energy Prices on Leading African Countries Sustainable Growth. Economic Computation and Economic Cybernetics Studies and Research, 52(1), 127-142.
Ahmad, A. U., Ismail, S., Dayyabu, S., Adnan, A. A., Farouq, I. S., Jakada, A. H., & Mustapha, U. A. (2020). Non-Linear Causal Link between Central Bank Intervention and Exchange Rate Volatility in Nigeria. Global Journal of Management and Business Research, 20(6), 1-14.
Al-Khazali, O. M., & Mirzaei, A. (2017). The Impact of Oil Price Movements On Bank Non-Performing Loans: Global Evidence from Oil-Exporting Countries. Emerging Markets Review, 31, 193-208.
Alkhawaldeh, B. Y., Mahmood, S., & Jakada, A. H. (2020). An Empirical Assessment of the Effect of Taxes and Interest Rate on Economic Growth in Jordan: An Application of Dynamic Autoregressive-Distributed Lag. Research in World Economy, 11(3), 1-7.
Ashraf, B. N. (2018). Do Trade and Financial Openness Matter for Financial Development? Bank-Level Evidence from Emerging Market Economies. Research in International Business and Finance, 44, 434-458.
Bayraktar, Y., Taha, E. G. R. I., & Yildiz, F. (2016). A Causal Relationship Between Oil Prices Current Account Deficit, And Economic Growth: An Empirical Analysis from Fragile Five Countries. Ecoforum Journal, 5(3), 29-44.
Breitung, J. (2002). Nonparametric Tests for Unit Roots and Cointegration. Journal of Econometrics, 108(2), 343-363.
Brychko, M., Bilan, Y., Lyeonov, S., & Mentel, G. (2020). Trust Crisis in The Financial Sector and Macroeconomic Stability: A Structural Equation Modelling Approach. Economic Research-Ekonomska Istraživanja, 34(1), 1-28.
Charfeddine, L., & Barkat, K. (2020). Short-and Long-Run Asymmetric Effect of Oil Prices and Oil and Gas Revenues on the Real GDP and Economic Diversification in Oil-Dependent Economy. Energy Economics, 86, 1-20.
Chen, H., Liao, H., Tang, B. J., & Wei, Y. M. (2016). Impacts of OPEC's Political Risk On the International Crude Oil Prices: An Empirical Analysis Based on the SVAR Models. Energy Economics, 57, 42-49.
Dabachi, U. M., Mahmood, S., Ahmad, A. U., Ismail, S., Farouq, I. S., Jakada, A. H., & Kabiru, K. (2020). Energy Consumption, Energy Price, Energy Intensity Environmental Degradation, and Economic Growth Nexus in African OPEC Countries: Evidence from Simultaneous Equations Models. Journal of Environmental Treatment Techniques, 8(1), 403-409.
Ehigiamusoe, K. U., & Lean, H. H. (2019). Influence of Real Exchange Rate On the Finance-Growth Nexus in the West African Region. Economies, 7(1), 23-30.
Gazdar, K., Hassan, M. K., Safa, M. F., & Grassa, R. (2019). Oil Price Volatility, Islamic Financial Development and Economic Growth in Gulf Cooperation Council (GCC) countries. Borsa Istanbul Review, 19(3), 197-206.
Jakada, A. H., Mahmood, S., Ahmad, A. U., Faruq, I. S., & Mustapha, U. A (2020a). The Effect of Oil Price on The Quality of Environment in Nigerian. International Journal of Scientific & Technology Research, 9(3), 1-8.
Jakada, A. H., Mahmood, S., Ahmad, A. U., Farouq, I. S., & Mustapha, U. A. (2020b). Financial Development and The Quality of the Environment in Nigeria: An Application of Non-Linear ARLD Approach. Journal of Environmental Treatment Techniques, 8(1), 403-409.
Jakada, A. H., Mahmood, S., Ahmad, A. U., & Bambale, S. A. (2020c). Heterogeneous Moderating Influence of Economic Growth on Financial Development and Environmental Quality in Africa. Journal of Critical Reviews, 7(14), 127-133.
Jakada, A. H., & Mahmood, S. (2020d). An Asymmetric Effect of Economic Growth, Foreign Direct Investment and Financial Development on the Quality of Environment in Nigeria. The Journal of Management Theory and Practice (JMTP), 1(1), 5-13.
Jehan, Z., & Hamid, A. (2017). Exchange Rate Volatility and Capital Inflows: Role of Financial Development. Portuguese Economic Journal, 16(3), 189-203.
Kamalu, K., Wan Ibrahim, W. H., Ahmad, A. U., & Mustapha, U. A. (2019). Causal link between financial developments, financial inclusion and economic growth in Nigeria. International Journal of Scientific and Technology Research, 8(12), 2757-2763.
Kayalar, D. E., Küçüközmen, C. C., & Selcuk-Kestel, A. S. (2017). The Impact of Crude Oil Prices On Financial Market Indicators: Copula Approach. Energy Economics, 61, 162-173.
Łasak, P., & van der Linden, R. W. (2019). China’s Financial Deepening and Its ‘Belt and Road’Funding Dilemma in a Global Context. In The Financial Implications of China’s Belt and Road Initiative(125-162). Cham: Palgrave Pivot.
Naeem, M. A., Peng, Z., Suleman, M. T., Nepal, R., & Shahzad, S. J. H. (2020). Time and Frequency Connectedness Among Oil Shocks, Electricity and Clean Energy Markets. Energy Economics, 91, 104-125.
Önder, Z., & Özyıldırım, S. (2019). Foreign Banks and Short-Term Macroeconomic Fluctuations: Do Financial Development and Regions Matter? Economic Systems, 43(1), 63-76.
Pesaran, M.H., Shin, Y., Smith, R.J. (2001), Bounds Testing Approaches to The Analysis of Level Relationships. Journal of Applied Economics, 16, 289-326.
Sanusi, K. A., Meyer, D., & Ślusarczyk, B. (2017). The Relationship Between Changes in Inflation and Financial Development. Polish Journal of Management Studies, 16, 13-25.
Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modeling Asymmetric Cointegration and Dynamic Multipliers in A Nonlinear ARDL Framework (281–314). In W. C. Horrace and R. C. Sickles (Ed.). Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications. New York: Springer.
Vo, A. T., Van, L. T. H., Vo, D. H., & McAleer, M. (2019). Financial Inclusion and Macroeconomic Stability in Emerging and Frontier Markets. Annals of Financial Economics, 14(02), 195-210.
Xiao, J., Zhou, M., Wen, F., & Wen, F. (2018). Asymmetric Impacts of Oil Price Uncertainty On Chinese Stock Returns Under Different Market Conditions: Evidence from Oil Volatility Index. Energy Economics, 74, 777-786.
Iranian Economic Review
Volume 26, Issue 4
December 2022
Pages 833-851

Files

Share

How to cite

Statistics