Exchange Rate Regimes, Spot Market Dynamics, and Economic Growth in Nigeria

This study investigated the effect of exchange rate regimes and spot market dynamics on economic growth in Nigeria over the period 1986–2025. Specifically, the study examined the long-run and short-run relationships between exchange rate regimes, spot market dynamics, and economic growth, determined the direction of causality among the variables, and evaluated the stability of the estimated model. The study adopted an ex post facto research design using annual time series data obtained from the Central Bank of Nigeria (CBN), National Bureau of Statistics (NBS), World Development Indicators (WDI), and International Monetary Fund (IMF). The analysis employed the Augmented Dickey-Fuller (ADF) unit root test, Johansen cointegration test, Vector Error Correction Model (VECM), Granger causality test, VEC residual diagnostic tests, and CUSUM stability test. The theoretical framework was anchored on the Mundell–Fleming Model, Purchasing Power Parity (PPP) Theory, and Optimum Currency Area (OCA) Theory. The findings revealed the existence of a long-run equilibrium relationship among the variables, with the Johansen Maximum Eigenvalue test indicating one cointegrating equation. The normalized long-run estimates showed that the nominal exchange rate exerted a significant negative effect on economic growth, while the floating exchange rate regime and spot exchange rate had significant positive effects. The real exchange rate exerted a positive but statistically insignificant effect on economic growth. The Granger causality test further revealed unidirectional causal relationships among the variables, while the diagnostic tests confirmed the absence of serial correlation (LM test, p = 0.8663) and heteroskedasticity (χ² = 114.1363, p = 0.1580). The CUSUM test indicated that the estimated VECM was structurally stable. The study concluded that exchange rate regimes and efficient spot market operations significantly influence Nigeria's economic growth. Therefore, the study recommended maintaining exchange rate stability, strengthening the flexible exchange rate regime, deepening the spot foreign exchange market, and coordinating macroeconomic policies to achieve sustainable economic growth.