Impact of Interest Rates on Exchange Rate in Nigeria: An Analytical Investigation

Keywords: Exchange rate, Interest rate, Time deposit rate, Treasury bill rate.×


This work examined the impact of interest rates on exchange rate in Nigeria. Data set was monthly collected from the Central Bank of Nigeria online database. Interest rates were represented by short term interest rates proxied by Lending Rate, Treasury bill rate, Saving/deposit rate and Time deposit rate. Price level (inflation rate) was included as a macroeconomic variable, between January 2007 and April 2021. Auto-Regressive Distributed Lag and Cointegration techniques were employed. Findings showed that in the short run, only Treasury bill rate and Price level have significant impact on foreign exchange rate. However, in the long run, all the four variables used to proxy short term interest rate have significant impact on foreign exchange rate in Nigeria. Although the speed of adjustment or switch was quite low, it was correctly signed and significant. The study therefore recommends that, the monetary authority uses Treasury bill rate to influence local currency to achieve short term goal and should adjust the lending rate, Treasury bill rate savings/deposit rate and time deposit rate to achieve long term stability in the local currency exchange rate.

Author Biography


Department of Economics, Lecturer I


Adebowale, E. A., & Akosile, A. I. (2018). Interest Rate, Foreign Exchange Rate, and Stock Market Development in Nigeria. Binus Business Review, 9(3), 247-253.

Adamu, F.B., & Sanusi, A.R. (2016). Effect of Additional Monetary Tightening on Exchange Rate Volatility in Nigeria: 2007 – 2016.

Caporale, G.M., Cipollini, A., & Demetriades, P.O. (2005). Monetary policy and the exchange rate during the Asian crisis: Identification through heteroscedasticity. Journal of International Money and Finance, 24(1), 39–53. doi:10.1016/j.jimonfin.2004.10.005.

Chenery, H. B. & Stout, A. (1966). Foreign assistance and economic development. Ameri- can Economic Review 55: 679 - 733.

Central Bank of Nigeria. (2014). Economic Report: First Quarter 2014. Economic Report. economic report for first quarter 2014.Pdf.

Central Bank of Nigeria Database: (Accessed on 18th May, 2021.
Gudmundsson, G.S., & Zoega, G. (2016). A double-edged sword: High interest rates in capital control regimes. Economics: The Open-Access, Open-Assessment E-Journal, 10(2016-17): 1-38. doi:10.5018/economics-ejournal.ja.2016-17.

Hassan, A., Abubakar, M., & Dantama, Y.U. (2017). Determinants of exchange rate volatility: New estimates from Nigeria. Eastern Journal of Economics and Finance, 3(1), 1-12.

Jhingan, M.L. (2011). Monetary Economics. 7th edition, Vrinda Publication Ltd. Nisha Enterprises Delhi-53.

Jhingan, M. L. (2013). Macro-Economic Theory, New Delhi, Vrinda Publications (P) ltd.

Musa, A. A., & Sanusi, A. R. (2020). Effect of Interest Rate on Exchange Rate Management in Nigeria, Nigerian Journal of Economic and Social Studies, Volume 62, No. 3, 295-313.

Mordi, C. N. (2006). Challenges of Exchange Rate Volatility in Economic Management in Nigeria. CBN Bullion, 30(3). 37-46.

Izunobi, A. O., Nzotta, S. M., Geoffrey, U., & Benedict, O. (2019). Effects of Exchange Rate, Interest Rate, and Inflation on Stock Market Returns Volatility in Nigeria. DOI:10.18775/ijmsba.1849-5664-5419.2014.56.1005

Keynes, J. M. (1923). A Tract on Monetary Reform, London: Macmillan.

Khan, S. A. (2010). Empirical Study on Impact of Interest Rate on Exchange Rate (June 15, 2010). Available at SSRN: or

Lu, X., and In F. (2006). Monetary Policy, Open Market Operations and New Zealand Interest-Rate and Exchange-Rate Markets, Journal of the Asia Pacific Economy, Vol. 11, No. 4, pp 462–481.

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. doi:10.1002/jae.616

Sarac, S., & Kargoz, K. (2016). Impact of Short-term Interest Rate on Exchange Rate: The Case of Turkey, Procedia Economics and Finance 38. Pg. 195 – 202

Turner, P. (2010). "Power Properties of the CUSUM and CUSUMSQ Tests for Parameter Instability," Applied Economics Letters, Taylor & Francis Journals, vol. 17(11), pages 1049-1053.

Yusuf, W. A., Oyegoke, E. O., Gylych, J. & Haruna, T. (2019). Determinants of Exchange Rate in Nigeria: A Comparison of the Official and Parallel Market Rates. The Economics and Finance Letters. Volume 6 (2), pp 178-188.
How to Cite
BABALOLA, A. (2022). Impact of Interest Rates on Exchange Rate in Nigeria: An Analytical Investigation. Timisoara Journal of Economics and Business, 14(2), 107-124. Retrieved from