INVESTIGATING THE ASYMMETRIC EFFECT OF EXCHANGE RATE ON DOMESTIC CREDIT VOLUMES: EVIDENCE FROM NIGERIA

Yusuf Toyin Yusuf a,*, Noah Afees Oluwashinabc, Abdul Muftah Shitua, Muktar Sabi Adamua & Lukman Adama

a Department of Economics and Development Studies, Faculty of Management and Social Sciences,
Kwara State University, Malete, Nigeria.

b Department of Economic Sciences, Faculty of Economic and Management Sciences, North-West University,
Vaal Campus, South Africa.

c Department of Liberal Studies, Institute of General Studies, Kwara State Polytechnic, Ilorin, Nigeria.

* Corresponding author’s email: This email address is being protected from spambots. You need JavaScript enabled to view it.

Abstract

Increasing domestic credit is crucial for economic growth, particularly in developing countries like Nigeria, where it enables firms to mitigate exchange rate risks during periods of financial instability. This study employs the first-generation speculative attack model as its theoretical framework to examine the long-run asymmetric impact of exchange rate fluctuations on domestic credit in Nigeria from 1973 to 2022. The Non-linear Autoregressive Distributed Lag (NARDL) model is utilised to capture potential asymmetries. Notably, the findings indicate that currency appreciation shocks have stronger and more persistent effects on domestic credit compared to depreciations. Additionally, foreign interest rates and gross domestic product are identified as key drivers of credit expansion, while the domestic interest rate proves ineffective, underscoring structural vulnerabilities in monetary policy transmission. In light of these findings, policymakers should consider implementing asymmetric capital buffers and dynamic loan-tovalue ratios to address the disproportionate impact of currency appreciation on credit expansion. Furthermore, adopting a managed float exchange rate system with strategic interventions is recommended to mitigate disruptive foreign exchange volatility.

Keywords:  Asymmetry effect, Domestic credit, Exchange rate, NARDL

INVESTIGATING THE ASYMMETRIC EFFECT OF EXCHANGE RATE ON DOMESTIC CREDIT ....

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