DYNAMIC EFFECTS OF REMITTANCES ON EXTERNAL RESERVES IN NIGERIA: THE ROLE OF INFLATION AND STRUCTURAL BREAKS

Abstract

This study provides additional information about the drivers of external reserves in Nigeria. The result using the autoregressive distributed lag (ARDL) model estimation approach for the period 1980–2015 shows that remittances, among other macroeconomic variables, increased external reserves in the short run but weakened them in the long run. Remittances deplete external reserves through their effect on the inflation rate and the non-sterilized intervention of the Central Bank. Furthermore, the regime shift to a relatively floating exchange rate causes remittances to increase reserves. From the foregoing, it is important for the authorities to continue operating at a relatively flexible exchange rate and curtail excessive spending on remittances.