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Due to the persistence of demand pressure in the foreign exchange market in Nigeria in the face of fluctuating
crude oil prices, which is the major export commodity and source of foreign exchange in the economy, there
has been a severe negative impact on the macroeconomic performance of the country. The study analyzes the
determinants of the foreign exchange market pressure as well as the relative impact of the domestic and
foreign factors play in Nigeria. To achieve this objectives, monthly time series data from 1995 – 2016 were
used. First, to compute an index for the foreign exchange market pressure using alternative methods, and to
study the behaviour of the foreign exchange market pressure during the period under review. Secondly, a
single equation model of foreign exchange market pressure was developed for the empirical evaluation of the
determinants of the foreign exchange market pressure. The Generalized Method of Moments (GMM)
estimation was used (with HAC-weighting and covariance) because of endogeniety and heteroskedasticity. The
result shows that in order magnitude domestic factor such as level of imports, Domestic credit to private sector and inflation rate with external factor of Global indicator for volatility were statistically significant factors responsible for depreciating market pressure as only external factor of international crude oil prices accounted for appreciating market pressure. It was found on the other hand that capital flows (in the form foreign portfolio inflows) and share returns on All-share index were not statistically significant factors. Furthermore, policy strategies such as Dutch auction systems, devaluation of the domestic currency and liberalization of the foreign exchange market were found to be effective strategies for abating foreign exchange market pressure. The study therefore recommends that government should be cautious of using monetary policy to stimulate the economy as expansionary monetary policy stance could have a negative effect on the foreign exchange market. However, the use of the identified exchange rate strategies such as Dutch auction systems, devaluation of the domestic currency and liberalization of the foreign exchange market could prove effective in mitigating the foreign exchange market pressure.
1.1 Background to the Study
Excessive Foreign Exchange Market Pressure (FEMP) could be considered as detrimental to
domestic economic performance in any de
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