Abstract:
Since September 1986, when market determined exchange rate system was introduced, the naira
exchange rate has exhibited the features of continuous depreciation and instability. This instability and
continued depreciation of the naira in the foreign exchange market has resulted to declines in investments as a
result of high degree of uncertainty in the Nigeria business environment, standard of living of the populace and
increased cost of production which leads to cost push inflation. Against this background, this research seeks to
undertake an empirical analysis of the link between exchange rate fluctuations and private domestic investment
in Nigeria. Descriptive statistics and econometric method were employed. Thus, simple averages of descriptive
statistics, and Error Correction Model (ECM) technique within the Ordinary Least Square estimation were
employed to analyze the various trends in the data. The descriptive statistics of the variables included in the
model shows the existence of wide variations in the variables as depicted by the standard deviation of the
exchange rate variable that was unusually high. This depicts a high degree of volatility in the exchange rate
during the period under investigation. The findings suggest that, the depreciation of the currency and interest
rate does not stimulate private domestic investment activities in Nigeria. On the other hand, infrastructures,
government size and inflation rate had a positive effect on private domestic investment in Nigeria. It is thus
recommended that monetary authorities should adopt appropriate policy in appreciating the value of the naira
as devaluation has been a mistake since 1986, reduce borrowing and lending charges to boast the performance
of private domestic investment through stable macroeconomic environment.
