Thesis Abstract

Abstract
This research project aims to conduct an empirical study on the foreign exchange rate premium in Nigeria from 1970 to 2007. The foreign exchange rate premium is a critical indicator of the efficiency of the foreign exchange market and the overall economic stability of a country. Nigeria, as an oil-dependent economy, has experienced fluctuations in its exchange rate premium due to various internal and external factors during the specified period. The study utilizes a comprehensive dataset that includes exchange rate data, inflation rates, GDP growth figures, and other relevant economic indicators to analyze the dynamics of the foreign exchange rate premium in Nigeria. The research employs econometric models such as regression analysis to investigate the relationship between the exchange rate premium and key macroeconomic variables. The findings of this study are crucial for policymakers, investors, and researchers interested in understanding the factors influencing the foreign exchange rate premium in Nigeria. By identifying the determinants of the exchange rate premium and their impact on the economy, this research provides valuable insights into the functioning of the foreign exchange market and the broader economic landscape of Nigeria. The research contributes to the existing literature on exchange rate dynamics and economic stability in developing countries, particularly in the context of Nigeria. The study's results can inform policy decisions aimed at improving the efficiency and stability of the foreign exchange market, which is essential for promoting economic growth and attracting foreign investment. Overall, this empirical study on the foreign exchange rate premium in Nigeria from 1970 to 2007 sheds light on the complexities of exchange rate movements in the country and offers valuable implications for policymakers and stakeholders. By examining the determinants of the exchange rate premium and their effects on the economy, this research enhances our understanding of Nigeria's foreign exchange market and contributes to the ongoing discourse on economic stability and development in the region.

Thesis Overview

This work evaluates the trends in the parallel market exchange rate premium, its determination and impact on the foreign exchange market in Nigeria. It examines the impact of existing demand and supply gaps in the overall foreign exchange market on the determination of the parallel market premium. It further examines the impact of the parallel market exchange rate premium on the determination of the official exchange rate and the parallel market rates. The study uses the stock-flow model of Kiguel and O’connel (1994) to examine the impact of the parallel market exchange rate premium on the determination of the official exchange rate and the parallel market exchange rate. The estimation results reveal that the parallel market exchange rate premium has a significant negative effect on parallel market exchange rate in Nigeria. Thus, an increase in the foreign exchange rate premium tends to reduce the next round of parallel market exchange rate. On the other hand, the parallel market exchange rate premium affects the official exchange rate positively. This is because a high premium on the parallel market exchrange rate tends to increase the demand for foreign exchange at the official rate. The examination of the impact of the demand and supply gaps in the foreign exchange market shows that the coefficient of exchange rate imbalance can be negative or positive depending on whether there is excess demand or supply condition in the market.