The Causal Link among Foreign Direct Investment, Inflation, and Exchange Rate in the Nigerian Economy

This paper studies the dynamic link among Foreign Direct Investment (FDI), inflation, and exchange rate fluctuation in Nigeria. Foreign Direct Investment is assumed to benefit a developing country like Nigeria, not only by supplementing domestic investment, but also in employment creation, transfer of technology, increased domestic competition, and other positive externalities. This is yet to be substantiated and provides the ground for this study on how this relates inflation and exchange rate in the Nigerian economy. Using time series data, data for the study were collected from world bank development indictors from 1985 to 2021. Pearson Correlation was used to test the hypothesis with aids of Autoregressive Distributive Lag (ARDL) model. The findings revealed that there is a significant long run relationship between AGDP, FDI, FPI, CPS, MS, EXCH, and INF in Nigeria. The study indicates that economic growth in Nigeria is directly related to foreign investment inflow and economic growth in Nigeria. Specifically, MS FPI have bidirectional causality in the Nigerian economy. Inflation was also found to granger cause exchange rate in the economy. The paper thereby recommends among others that there is a need for the government to attract more foreign direct investment inflow into the Nigerian economy by ensuring that there is stability in macroeconomics and the political environment is achieved.