Chronic Sorrow

Living with Chronic Sorrow The middle range theory of chronic sorrow theory was researched in the 1980’s validating parent’s feelings over the loss of not having the perfect child and having a child with a disability. Chronic sorrow provided a framework for understanding the reactions of individuals to various loss situations and offered a way to view the experience of bereavement. Involvement in an experience of a significant loss is the necessary antecedent to the development of chronic sorrow (Peterson & Bredow, 2009). The loss may affect individuals and family members at any time. Chronic sorrow may come to any of us during our lifetime. Chronic sorrow can best be described as a natural response to a tragic situation. Where life experiences cause deep distress, sadness, or regret especially for the loss of someone or something loved ( Gordon, 2009 ). Chronic sorrow is followed by a permanent loss of a personal attachment that may be ongoing with a sadness of such intensity that it recurs for the lifetime of the person. Mental pain, suffering and despair can all occur from chronic sorrow regardless if the loss is caused by injury, trauma or by death ( Alligood, & Tomey,(2010). Washington Irving says it best, â€Å"There is a sacredness in tears. They are not the mark of weakness, but of power. They speak more eloquently than ten thousand tongues. They are messengers of over whelming grief and unspeakable love. † The rational for choosing the middle range theory of chronic sorrow was because this theory was easy to identify with. From losing a home to a natural disaster, a job, and even in death of family members, friends and numerous pets this theory really hit home from personnel experiences. Possible Antecedents, Defining Attributes and Consequences Let’s start but trying to understand the antecedents of chronic sorrow and how they relate to ach other and affect each of us as individuals. This may help to understand how strongly emotions control and play an important part in our everyday lives. The antecedents that go along with chronic sorrow are loss and grief. They are experienced periodically by individuals of all ages through their life time. Whether in the death of a family member, friend or pet, losing a home and all worldly possessions or losing a functioning body part. To be able to get through these powerful feelings and emotions can be very difficult and even more difficult for others to understand (Peterson & Bredow, 2009). People all over the world are forced to deal with this daily, but until it happens to you, do you truly begin to understand the impact this has on ones’ own life. Every one of us will have to deal with loss at some time in our life. A loss can be described as â€Å"a pervasive psychic pain and sadness, stimulated by certain trigger events, which follows loss of a relationship of an attachment† (Teel,1991, pg. 1316). Losses come in many forms both large and small, such as loss of a job, a home, a way of life, a relationship, or loss of a significant other, spouse, family member or even a pet. The perception of the event, the situational supports, and the coping mechanisms all influence return of equilibrium or homeostasis. A person either advances or regresses as a result of the crisis, depending upon how the person manages the crisis (Potter & Perry, 2009). Experiencing a loss can trigger the grief process. Everyone is different and comes to terms with loss in different ways, so it is difficult to say how long a person’s process may take. Losses that are smaller and have less of an impact on peoples’ lives will take a much shorter time to resolve emotionally than more significant losses (Foust, 2006). Some people deal with the loss a day at a time, yet for some people it may be an hour at a time. As long as the person is not denying the loss, they are working through it. Action oriented is an internal management for coping with a loss. This includes continuing to be involved in interests, hobbies, activities, talking with friends, professionals and even joining a support group (Peterson and Bredow,2009). Lost your job, your home, a loved one, or a beloved pet? There are many forms of loss, and all are felt individually on a very personal level (Foust, 2006). A loss is losing or being deprived of something you once had. Any loss can have a profound effect on your life. Loss can happen at any time day or night and does not need a reason. A consequence of a loss can stop you from socializing, cause you to have lack of interests, and take you emotionally away from those who love you. A loss can impact your job, your home, your finances, and your relationships. This is a real emotion that people around the world experience daily. Coping with loss and grief can be challenging in many ways (Teel. 1991). A loss may be felt physically and emotionally, like something is missing. A feeling of worry and emptiness may be felt deep inside. Two types of losses most relevant to depressive symptoms are related to self, goal attainment, and loss of financial resources (Van Horn & Mischel, 2008). One may begin to suffer physical symptoms such as headaches, gastrointestinal upset, anxiety, sleeplessness, or anorexia. Emotionally you may feel tired, lack the ability to care about what is going on around you, sleep too much or too little, over eat or under eat, and neglect yourself and those around you. These are all feelings and emotions a person may experience in grief. Loss is an experience caused by changes and recognizing these changes are important in dentify feelings and most importantly, by allowing individuals to feel and express themselves begins the healing process (Love, 2007). Grief comes in many shapes and sizes. There is no â€Å"one size fits all† for the grieving process. Grief is the series of emotions that a person goes through after a loss. Grief may involve feelings of sadness, anger, guilt, shame, relief, jealousy, hopelessness and powerlessness ( Love, 2007). Many people allow for grief after the passing of a loved one, but many of today’s views tend to ignore the grief that can follow other kinds of losses. As a result, people find themselves unexpectedly alone dealing with the sorrow, anger and other emotions associated with grief at various times in their life. Confused and even ashamed, they may attempt to hide or avoid these emotions, pushing them inward rather than letting them out. This may cause destructive and devastating repercussions which can follow. Yet all of this can be avoided, if people recognize that there are all kinds of grief (Castledine,2002). Learning to deal with the loss and cope with ones misfortunes is where grief comes in. So, how long is the grieving process? Basically, a person grieves as long as it takes to come to terms with their loss and the impact that it has had on their life (Foust, 2006). The obvious time for grieving is after the death of a loved one. Many people experience this first with grandparents and parents, as well as aunts, uncles and family pets. Some people may suffer the difficult loss of siblings or spouses and still others may experience the tragic loss of a child. There is no way to measure grief, and no instrument or scale to measure for sorrow. Each person grieves these losses uniquely and differently. When a death of a loved one occurs those left ehind are often allowed time and space for grieving and usually supported by family and friends (Burglass, 2010). But what happens when someone loses a beloved pet? Or when a family loses a home? Or better yet the loss of a functioning body part, example hearing, seeing or loss of limb? These too are times of great loss. Unfortunately, they are seldom recognized as suc h and because of this the grieving are left alone to work through emotions that are many times misunderstood by those around them (Castledine, 2002). Coworkers, friends or even spouses can find it hard to understand ones grief and even find it difficult to handle. A person must grieve in order to heal and move forward. The suffering of dazed confusion, distress and unrelenting despair will generally ease with time (Love, 2007). At home, whenever you are alone, don’t push or force yourself to do anything. Relax and do what comes naturally. Many cultures do not encourage people to grieve openly. Crying and other ways of expressing distress can be seen as signs of weakness. Crying can actually help relieve stress, so cry, take a bath or watch television (Gipson, 2009). Do whatever makes you feel comfortable and helps you relax. Management forms of grief can be in the form of faith, istractions, like work, hobbies, and honoring your loss through ritual is important in overcoming the loss. There are many ways to go through the grieving process, regardless of how one grieves, grief is critical in the healing process (Potter & Perry, pg. 496). Any loss can warrant grief. Grief is a normal reaction to loss and is not usually associated with lon g term negative consequences. Grief is a natural psychological and sometimes physical response to loss or change. Though death is most commonly associated with grieving, many other life changes can have the same result (911, Oklahoma City bombing). Losing a job (being laid off after working several years for the same company), losing a home (natural disaster, fire, tornado or even hurricane), having children leave home ( go away to college, military service, get married), retiring, divorce, declaring bankruptcy (loss of financial resources) a breakup, even moving can all create a sense of real loss and grief (Love, 2007). Grieving is a natural and healthy reaction to all losses. The five stages of grief denial, anger, bargaining, depression and acceptance are all natural feelings when one experiences a significant loss. These can also be overlapped with shock, yearning and protest, despair, and recovery (Buglass, 2010). Grieving helps people understanding what has occurred and how to adapt to a new set of circumstances in their life. What makes the grieving process so challenging, is that many of the emotions we experience are painful and most people do not want to feel painful emotions. Another challenging piece is that many people are not prepared for the variety of emotions that occur. Most people expect to feel sad, but may not expect to feel angry, anxious, hopeless, terrified, confused, frustrated, lonely, and so on. The emotions felt do not occur in any predictable pattern and many people often tend to cycle through them throughout the grieving process (Drench, 2004). Grief is something that cannot be fixed and one cannot take a pill to make the grief go away. A person needs to experience the loss and all the negative emotions that result in order to accept the loss. Grief cannot be medicated with pills or alcohol. In fact, individuals that do attempt to take medication are using their own form of denial which usually lengthens the process and may even add a drug or alcohol addiction problem on top of their grief. The good news is that there are things that people can do to help cope and work through the grief process (Potter and Perry, pg. 496). These are a few examples people may use to help work through the grieving process. Take care of yourself by getting rest, eating regularly and maintain a regular routine. This can be challenging during the early process, but is essential with recovery (Potter & Perry, pg. 496). Support systems of family, friends and colleagues who will listen, offer advice and provide emotional support can benefit you. Talk about your loss helps get your thoughts and feelings ut. Journaling is also a helpful to get your thoughts out. In a private journal or diary people are able to express their emotions and vent their feelings honestly without hurting anyone or without concern for how they may appear to others (Potter & Perry, pg. 496). Time management techniques include developing a list of tasks that are felt to be important and need to be accomplished. Perform the tasks at the top of the list that require immediate attention, those that are not as important can be delayed (Potter & Perry, pg. 497). Guided imagery and visualization can help with relaxation. Gather pictures and other things that remind you of your loss, person, pet, house or phase of your life you have lost. Try talking with family and friends about your memories. Funniest, worst, happiest, anything you share will help with adjusting to the loss. Play music that reminds you of your loss. Music is a powerful memory that can make you feel good or is comforting to you (Potter & Perry, pg. 497). Progressive muscle relaxation may help with physiological tension. Exercise, fresh air, Sunshine, visiting with friends may all help. Deep breathing exercises may help reduce stress nd relax muscles (Potter & Perry, pg. 497). Have a friend share in an activity that may have been your activity with what or whom you lost. An example would be if you went to breakfast every morning at McDonalds, it can make you sad and upset to think about going back there. Sharing the activity with a friend will not replace your loss, but may help establish a new routine for you. That is what grieving i s about, facing and dealing with your new circumstances rather than avoiding them (Gipson, 2009). Many of these suggestions are easy things to do. What is not easy is managing negative motions. The grieving process does take time, but you can get through the loss and grief by dealing with your emotions one day at a time. None of these suggestions will take grief away, but may help to manage feelings and emotions that are experienced. Managing ones feelings can assist in feeling like the person is taking an active role again in their life. If the feelings a person experiences becomes overwhelming or significantly interferes with their life (can’t go to work, feeling suicidal, panic attacks, difficulty in carrying out every day routines, etc. ). This person ould likely benefit from seeing a therapist that can assist them with the grieving process and help them with acceptance and recovery (Buglass, 2010). Grieving can be difficult and a person does not have to go through this a lone (Gipson, 2009). Case Study Three young men, Brad, Tom and Mike return home from active military duty with the loss of a lower leg while fighting for our country. Each man experiences their loss differently and uniquely. The first, Brad, is supported by his wife, parents, two children and many other family members and friends. Brad’s leg has healed and a useful diverse type of prosthesis has been itted to his lower leg. After many months of rehabilitation Brad is able to walk again with the use of his new prosthesis. The prosthesis fits well with no skin irritations. Brad is able to enjoy many of the things he did prior to losing the leg (fishing, dancing, playing ball with his child). Brad is a very spiritual man and with the help of his wife, parents, family and friends he has been able to accept his loss and move forward. The quality of life Brad once new has slowly returned to an almost normal state. Although Brad does miss the loss of is leg he has adjusted to his ne w life and faces daily challenges as they come. The second, Tom, is also supported by his wife, parents, one child and many friends and family. The leg due to infection took longer than Tom expected to heal delaying his recovery time. Tom had a useful diverse type prosthesis fitted to his lower leg. Tom attended many more months of rehabilitation than Brad, do to skin integrity problems. Skin issues have disrupted the daily use of the prosthesis interfering with Tom’s independence and lifestyle. Tom has had difficulty at first adjusting to his new lifestyle. Everyday tasks have been very challenging for Tom at times. Toms’ wife, parents, family and friends have een very supportive to Tom every step of the way. A remote controlled wheel chair is available for Tom on the days he is unable to wear his prosthesis. Tom has learned to do many tricks with his wheel chair and has joined a wheel chair basketball team because he likes showing off. Toms’ acceptance and recovery was a lot slower, but in the end he was abl e to adjust to his new lifestyle. The third, Mike, is supported by his wife, parents, family and friends. Mike was diagnosed with Diabetes after returning home from active duty. Mikes’ leg had a hard time healing due to infection and adjustment to having Diabetes. Mike did not like having Diabetes and would refuse to eat the right foods. Mikes’ blood sugar was out of control because of his refusal to take medication prescribed and frequently drinking. These actions were responsible for causing skin integrity problems. After a long, hard, trying year, the leg finally healed. Mike was fitted with a useful diverse type prosthesis. Skin issues continued to be a problem because of Mikes Diabetes and his refusal to eat healthy and take his medication properly. The prosthesis was painful and awkward for Mike to use. Just looking at the prosthesis filled Mike with such an incredible loss. Mike was angry with everyone that tried to help him. He sat day after day in a wheelchair drinking beer. Mike refused to take a bath, shave, eat, or go anywhere he might be seen by people that knew him. Mike would stay for days at a time in bed and refuse to get up. Counseling was verbally rejected every time counseling was brought up by anyone. Mikes’ doctor placed him on depression medication which he refused to take on a regular basis. Mikes friends stopped dropping by to see him. Mikes’ wife was having difficulties dealing with Mikes’ drinking and verbal abuse. She would argue with Mike till she cried and could no onger take Mikes’ drinking and feeling sorry for himself. His parents tried being very supportive, but also found Mike really difficult to deal with. Mike continued to drink and blamed everyone for the loss of his leg. Mike refused to accept the loss or move forward. Mikes’ wife finally after two years had all the verbal abuse she coul d handle and left him. Mike ended up moving back home and living with his parents. He still is unable to wear the prosthesis and to this day rarely leaves his parents’ home. As a nurse working with individuals, families and patients we need to be able to recognize hese individuals that are suffering. By listening to what the person is saying and their body language should be triggers for nurses if this is a person wanting, needing or requiring some kid of outside assistance. Chronic sorrow is characterized as pervasive, permanent, periodic sadness or other grief- related feelings associated with ongoing disparity resulting from a loss experience (Lindgren, Burke, Hainesworth, & Eakes,1992). The concept of chronic sorrow as you have read may go hand in hand with the antecedents grief and loss. For a person to experience one, they can experience the other. Even though the loss may have been for seen or was totally unexpected, a person does not always overcome the loss or grief over night. For some people this may take days, weeks or even years. Then for others like Mike, they may be so devastated over the loss with grief that the loss is unbearable. They never overcome the loss and live with chronic sorrow. Reference Alligood, M. R. , & Tomey, A. M. (2010). Nursing Theorists and Their Work (7th ed. ). Maryland Heights, Missouri: Mosby Elsevier Inc. Bickerstaff, K. A. , Grasser, C. M. , and McCabe, B. (2007). How elderly nursing home residents transcend losses of later life. Holistic Nursing Practice May/June 159-166 Bui, K. M. , Raugi, G. J. , Nguyen, V. Q. , & Reiher, G. E. , (2009). Skin problems in individuals with lower-limb loss: Literature review and proposed classification system. Journal of Rehabilitation Research & Development 46(11)1085-1090 Retrieved September 22, 2011, from: http://web. ebscohost. com/ehost/detail? vid=12&hid=17&sid=fb4631bd-e30d-4d04-86b9-9daef0a7f731%40sessionmgr104&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3 d#db=rzh&AN=2010582711 Castledine, G. ,(2002). Recognizing problems of loss in patients. Britsh Journal of Nursing Retrieved September 5, 2011, from: http://ezproxy. ardner webb. edu/login? url=http://search. ebscohost. com/login. aspx? direct=true&d b=c8h&AN=2009019179&site=ehost-live. Chan, C. , NG, S. , HO, R. , & Chow, A. , (2006). East meets West: applying Eastern spirituality in clinical practice. Journal of Clinical Nursing 15(7): 822-832 Retrieved September 18, 2011, from: http://ezproxy. snu. edu:2056/ehost/detail? vid =6&hid=8&sid=82932029-8cc8- 434b-afd5-63517ab0000e%40sessionmgr14&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ %3d%3 d#db=rzh&AN=2009258194 Clements, P. T , Benasutti, K. M. , & Carmone, A. , (2003). Support of Bereaved owners of pets. Perspectives in Psychiatric Care 39(2), 49-54 Retrieved September 18, 2011, from: http://web. ebscohost. com/ehost/detail? vid=20&hid=127&sid=1346ad7f-572a-4072-b160- a0ba9b0916e1%40sessionmgr104&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db= rzh&AN=2003162539 Curtis, R. C. , (2010). Social worker practitioners and the human-companion animal bond: a national study. Social Work 55(1), 38-46 Retrieved September 18, 2011, from: http://web. ebscohost. com/ehost/detail? vid=19&hid=127&sid=1346ad7f-572a -4072-b160-a0ba9b0916e1%40sessionmgr104&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ 3d%3d#db=rzh&AN=2010505488 Dickson, A. , Knussen, C. , & Flowers, P. (2007). â€Å"That was my old life; it’s almost like a past- life now†: Identity crisis, loss and adjustment amongst people living with chronic fatigue syndrome. Psychology and Health 23(4), 459-476. Dougherty, P. J. , McFarland, L. V. , Smith, D. G. , Esquenazi, A. , Blake, D. J. , & Reiber, G. E. (2010). Multiple traumatic limb loss: A comparison of Vietnam veterans to OIF/OEF service members. Journal of Rehabilitation Research & Development 47(4), 333-348 Drench, M. E. (2004). Loss, grief, and adjustment: A primer for physical theraphy, part 1 Retrieved September 5, 2011, from: http://ezproxy. snu. edu:2056/ehost/detail? vid=18&hid= 126&sid=69ff5835-74c8-43e1-bffd-3252bfa3a859%40sessionmgr111&bdata=JnNp dGU9ZWhvc3QtbGl2ZQ%3d%3d#db=rzh&AN=2003126574 Durkin, A. , (2009). Loss of a companion animal understanding and helping bereaved. Retrieved September 5, 2011, from: http://ezproxy. snu. edu:2056/ehost/detail? vid= 22&hid=126&sid=69ff5835-74c8-43e1-bffd-3252bfa3a859%40sessionmgr111&bdata= JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=rzh&AN=2010347175 Dugan, B. ( 2007). Loss of identity in disaster: How do you say goodbye to home? Perspectives in Psychiatric Care . 43(1),41-46 Retrieved September 8, 2011, from: http://content. ebscohost. com/pdf18_21/pdf/2007/22L /01Feb07/23785080. pdf? T=P&P=AN&K=2009508445&S=R&D=rzh&Ebsco Ehrlich, M. , Harville, E. , Buekens, P. , Pridjan, G. , & Elkid-Hirsch, K. , (2010). Loss of resources and hurricane experience as predictors of post partum depression among women in southern Louisiana. Journal of Womens Health 19(5), 877-884 Epstein, R. A. , Heinemann, A. W. , and McFarland, L. V. ,(2010). Quality of life for veterans and servicemembers with major traumatic limb loss from Vietnam and OIF/OEF conflicts. Journal of Rehabilitation Research & Development 47(4), 373-386. Retrieved September 18, 2011, from: http://web. ebscohost. com/ehost/detail? vid=22&hid=127&sid=1346ad7f-572a- 4072- b160-a0ba9b0916e1%40sessionmgr104&bdata=JnNpdGU9ZWhvc3QtbGl2 ZQ%3d%3d#d b=rzh&AN=2010714399 Foust, J. , (2006). Re: Grief sorrow loss and morning [Online forum comment]. Retrieved September 5, 2011, from: http://theraphyinphiladelphia. com/selfhelp/tips/C86/ Gailey, R. , McFarland, L. V. , Cooper, R. A. , Czerniecki, J. , Gambel, J. M. , Hubbard, S. , Maynard, C. , Smith, D. G. , Raya, M. , & Reiber, G. E. (2010). Unilateral lower-limb loss: Prosthetic device use and functional outcomes in servicemembers from Vietnam war and OIF/OEF conflicts. Journal of Rehabilitation Research & Development 47(11) 317-332 Gipson, J. , (2009) Living with loss. Mental Health Practice 12(5), 22-24. Retrieved September 18, 2011, from: http://ezproxy. snu. edu:2056/ehost/detail? vid=7&hid=8&sid=82932029- 8cc8-434b-afd5-63517ab0000e%40sessionmgr14&bdata=JnNpdGU9ZWhvc3Q tbGl2ZQ%3d %3d#db=rzh&AN=2010193668 Gordan, J. , (2009). An evidence-based approach for supporting parents experiencing chronic sorrow. Retrieved september 5, 2011, from: http://ezproxy. snu. edu:2056/ehost/pdfviewer /pdfviewer? sid=69ff5835-74c8-43e1-bffd-3252bfa3a859%40sessionmgr 111&vid=41&hid=126 Hamilton, M. , (2005). Grief and bereavement: coping with loss of a spouse. Journal of Nursing and Residential Care 7(5), 214-216 Retrieved September 22,2011, from: http://ezproxy. snu. edu:2056/ehost/detail? vid=6&hid=8&sid=82932029-8cc8-434b-afd5- 63517ab0000e%40sessionmgr14&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db =rzh&AN=2005101521 Kratza, A. , Williams, R. , Turner, A. , Raichle, K. , Smith, D. , & Ehde, D. (2010). To lump or to split? Comparing individuals with traumatic and nontraumatic limb loss in the first year after amputation. Rehabilitation Psychology 55(2), 126-138. Retrieved September 22,2011, from: http://web. bscohost. com/ehost/pdfviewer/pdfviewer? sid=fb4631bd-e30d- 4d04-86b9- 9daef0a7f731%40sessionmgr104&vid=13&hid=17 Lees, J. , (2008). A spiritual perspective on loss and bereavement. International Journal for Human Caring 12(2), 90-94. Love, A. W. , (2007). Progress in understanding grief complicated grief, and caring for the bereaved, Contemporary Nurse 27, 73-83. Mak, M. K. Y. , Yang, F. , & Pai, Y. , (2011). Limb collapse, rather than in stability, causes failure in sit-to-stand performance among patients with Parkinson disease. American Physical Therapy Association 91(3), 381-391. Retrieved September 18, 2011, from: Peterson, S. J. & Bredow, T. S. ,( 2009). Middle Range Theories Application to Nursing Reasearch (2nd ed. ). Philadelphia, Pennsylvania: Wolters Kluwer Lippincott & Wilkins Potter, P. A. & Perry, A. G. , (2009). Fundamentals of Nursing (7th ed. ). St. Louis, Missouri: Mosby Elsevier Inc. Risley-Curtis, C. , (2010). Social work practitioners and the human-companion animal bond: a national study. Social Work 55(1), 38-48. Retrieved September 18, 2011, from: http://web. ebscohost. com/ehost/detail? sid=0d5bc274-2c67-4cb4-8eca- 959ee2d730dd%40sessionmgr12&vid=1&hid=17&bdata=JnNpdGU9ZWhvc3 QtbGl2ZQ%3d%3d#db=rzh&AN=2010505488 Scaletti, R. , & Hocking, C. , (2010). Healing through story telling: an integrated approach for children experiencing grief and loss. New Zealand Journal of Occupational Therapy, 57(2), 66-71. Smallbone, C. , & Staniland, K. , (2011). Care in the community; what would happen if the lights went out? British Journal of Community Nursing 16 (7), 342-346. Teel, C. S. , (1991). Chronic sorrow: analysis of the concept, Journal of Advanced Nursing, 16, 1311-1329. Van Horn, E. & Mishel, M. , (2008). Loss of resources and depressive symptoms after traumatic injury. Southern Online Journal of Nursing Research 8(3), 15-37. Retrieved September 22, 2011, from: http://web. ebscohost. com/ehost/detail? vid=11&hid=17&sid=fb4631bd-e30d- 4d04-86b99daef0a7f731%40sessionmgr104&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d% 3d#db =rzh&AN=2010058219 Wells, D. L. , (2009 ). Associations between pet ownership and self-reported health status in people suffering from chronic fatigue syndrome, The Journal of Alternative & Complementary Medicine 15(4), 407-413. Retrieved September 18, 2011, from: http://web. ebscohost. com/ehost/detail? vid=20&hid=127&sid=1346ad7f-572a- 4072-b160-a0ba9b0916e1%40sessionmgr104&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ ]=%3d%3d#db=rzh&AN=2010261702 Wilson, H. S. , (1989). Research in Nursing (2nd ed. ). Redwood City, California. Addison Wesley

Strategies for Resuscitating Foreign Exchange Market in a Depressed Economy (a Case Study in Nigeria)

Strategies for Resuscitating Foreign Exchange Market in a Depressed Economy (A Case Study in Nigeria) By Ijaiya Tahir Adeniyi B. sc (Hons) Econs From Lagos State University, Ojo, Lagos State, Nigeria CHAPTER ONE INTRODUCTION 1. 1BACKGROUND OF THE STUDY Exchange rate arrangements in Nigeria have undergone significant changes over the past four decades (Alaba, 2003). It shifted from a fixed regime in the 1960s to a pegged arrangement between the 1970s and the mid-1980s, and finally, to the various types of the floating regime since 1986, following the adoption of the Structural Adjustment Programme (SAP).A regime of managed float, without any strong commitment to defending any particular uniformity, has been the predominant characteristic of the floating regime in Nigeria since 1986 (Alaba, 2003). These changes are not peculiar to the Naira as the US dollar was fixed in gold terms until 1971 when it was de-linked and has since been floated. The fixed exchange rate regime induced an ove rvaluation of the naira and was supported by exchange control regulations that engendered significant distortions in the economy.That gave vent to massive importation of finished goods with the adverse consequences for domestic production, balance of payments position and the nation’s external reserves level. Moreover, the period was bedeviled by sharp practices perpetrated by dealers and end-users of foreign exchange. These and many other problems informed the adoption of a more flexible exchange rate regime in the context of the SAP, adopted in 1986.In theory and practice, a prolonged misalignment of the exchange rate in the foreign exchange market will, in the medium term, tend to impact adversely on economic performance (MacDonald, 1997). Consequently, the authorities should always provide a timely intervention to ensure that the exchange rate is in equilibrium. The monetary authorities usually intervene through its monetary policy actions and operations in the money mark et to influence the exchange rate movement in the desired direction such that it ensures the competitiveness of the domestic economy.In Nigeria, maintaining a realistic exchange rate for the naira is very crucial, given the structure of the economy, and the need to minimize distortions in production and consumption, increase the inflow of non-oil export receipts and attract foreign direct investment. In order to give vent to this, this study shall examine the foreign exchange market in Nigeria with the view of investigating the relationship between the exchange rates and some macroeconomic variables. 1. 2STATEMENT OF RESEARCH PROBLEMThere has been an ongoing debate on the appropriate exchange rate policy in developing countries. The debate focuses on the degree of fluctuations in the exchange rate in the face of internal and external shocks. Exchange rate fluctuations are likely, in turn, to determine economic performance (Kandil and Mirzaie, 2003). In judging the desirability of ex change rate fluctuations in Nigeria, it becomes necessary to appraise the various exchange rate regimes adopted in Nigeria and evaluate their effects on output growth, pattern of domestic prices and some other macroeconomic variables.Their major setbacks would also be identified in order to suggest future course of action. 1. 3OBJECTIVES OF THE STUDY The specific objectives of this study are: i) to Identify the determinants of the foreign exchange rates; ii) to examine the impact of foreign exchange rates on the value of the country’s output; iii) to examine the impact of foreign exchange rates on foreign trade; iv) to examine the impact of foreign exchange rates on external reserve; v) to examine the impact of foreign exchange rates on domestic prices of goods and services. . 4RESEARCH METHODOLOGY The Econometric approach that would be adopted to examine the relevance of the exchange rate in the official foreign exchange market to the economic growth of Nigeria shall be the Ordinary Least Square (OLS) method. This econometric method would be used because it is very reliable and widely used in researches. Simple regression models shall be adopted to capture the effect of foreign exchange rate on economic growth, foreign trade, external reserve and the domestic prices of goods and services in Nigeria.The test of the hypotheses earlier stated would be done at 5% level of significance and as such, the generalization of the study findings would be limited to this extent. Secondary data would be used in this study. The relevant data to be used would be sourced from the Central Bank of Nigeria’s statistical reports, annual reports and statement of accounts for the years under review. 1. 5RESEARCH QUESTIONS The research questions, which would guide this study, are as follows: i) What are the determinants of foreign exchange rates? ii) What has been the impact of foreign exchange rate on the growth of Nigerian economy? ii) How does the foreign exchange r ate impacts on foreign trade of Nigeria? iv) What is the relationship between foreign exchange rate and external reserve? v) How does the exchange rate affects the domestic prices of goods and services in Nigeria? 1. 6RESEARCH HYPOTHESES The research hypotheses to be tested in the course of this study are stated below as: HYPOTHESIS I Ho : That there is no significant relationship between exchange rate and the economic growth of Nigeria. H1 :That there is a significant relationship between exchange rate and the economic growth of Nigeria.HYPOTHESIS II Ho : That there is no significant relationship between exchange rate and foreign trade in Nigeria. H1 :That there is a significant relationship between exchange rate and foreign trade in Nigeria. HYPOTHESIS III Ho : That there is no significant relationship between exchange rate and external reserve of Nigeria. H1 :That there is a significant relationship between exchange rate and external reserve of Nigeria. HYPOTHESIS IV Ho : That th ere is no significant relationship between exchange rate and domestic prices of goods and prices in Nigeria.H1 :That there is a significant relationship between exchange rate and domestic prices of goods and prices in Nigeria. 1. 7MODELS SPECIFICATION MODEL I gdp = a0 + a1 exr + e Where gdp-Gross Domestic Product exr -Exchange rate a0 and a1 -Parameters e -Error term A’ PRIORI EXPECTATION It is expected that a0 > 0 and a1 < O Exchange rate is the price of a currency in terms of another currency while gross domestic product is the value of the goods and services produced in a country within a specific period of time.Exchange rate is expected to affect the gross domestic product negatively. A high exchange rate would not allow for the importation of capital goods that are need for productive activity, thereby impair economic growth. This is based on neoclassical trade models. MODEL II bot = b0 + b1 exr + e Where bot-Balance of trade exr -Exchange rate b0 and b1 -Parameters e -E rror term A’ PRIORI EXPECTATION It is expected that b0 > 0 and b1 > O Balance of trade is the net difference between total export and import.The relationship between exchange rate and balance of trade is expected to be positive negative. This is because a high exchange rate would encourage exportation and discourage importation and thereby making the balance of trade favourable i. e positive (when export is higher than import). MODEL III exrev = c0 + c1 exr + e Where exrev-External reserve exr -Exchange rate c0 and c1-Parameters e -Error term A’ PRIORI EXPECTATION It is expected that c0 > 0 and c1 < O External reserve is the amount of money which a country holds in foreign currency.It represents the savings of a nation. It is often accumulated from the proceeds from external trade. A high exchange rate would mean that a country would have to pay more to pay for the goods and services from other countries and as a result would not have much as external reserve. So the r elationship between exchange rate and external reserve is expected to be negative. MODEL IV cpi = d0 + d1 exr + e Where cpi -Consumer price Index exr -Exchange rate d0 and d1-Parameters e -Error term A’ PRIORI EXPECTATION It is expected that d0 > 0 and d1 > OConsumer price index is a measure of the general price level in an economy and as such an indicator of the standard of living of the people. A high exchange rate would impair production causing the general price level to rise. Therefore, the relationship between exchange rate and consumer price level is expected to be direct i. e positive. MODEL V gdp = e0 + e1 exr + e2 bot + e3 exrev + e4 cpi + e Where exr -Exchange rate bot-Balance of trade exrev-External reserve cpi -Consumer price Index e0, e1, e2, e3 and e4 -Parameters e -Error termA’ PRIORI EXPECTATION It is expected that e0 > 0, e1 < 0 e2> 0 e3 > 0, e4 > 0 According to the neoclassical trade model, exchange rate is expected to affect the gross domestic produ ct negatively. A high exchange rate would not allow for the importation of capital goods that are need for productive activity, thereby impair economic growth. Balance of trade represents the net trade. A favourable balance of trade (i. e net export) would increase the gross domestic product. So balance of trade would vary directly with the gross domestic product.The external reserve is also expected to have positive relationship with the external reserve. High external reserve would stabilize the foreign exchange market which therefore creates conducive environment for improved production and trade. Consumer price index is an indicator of the standard of living of the people. A high standard of living is expected to increase labour productivity and thereby stimulating growth. So consumer price index would vary directly with the gross domestic product. A high exchange rate would impair production causing the general price level to rise.Therefore, the relationship between exchange ra te and consumer price level is expected to be direct i. e positive. 1. 8SIGNIFICANCE OF THE STUDY The significance of this study are as follows: i) It would provide an empirical effect of exchange rate on the economic growth; ii) It would contribute to existing literature by identifying the major factors that are responsible for the spread between the official and parallel foreign exchange market rates in Nigeria; iii) Lastly, it would provide policy recommendations to policy-makers on ways to resuscitate the foreign exchange market in Nigeria. . 9SCOPE AND LIMITATION OF THE STUDY This study would focus extensively on the foreign exchange policies of Nigerian government and how they impacted on the structure of the foreign exchange market. The spread between the parallel and official foreign exchange market shall also be examined with the view of identifying the factors responsible for the differences. In the bid to identify the strategies for resuscitating the foreign exchange mark et in Nigeria, the importance of the official exchange rate in the economic growth process of Nigeria shall be empirically investigated.The influence of the external reserve shall also be given due consideration. Besides, major issues in the foreign exchange policy and current development in the Nigerian foreign exchange market shall be examined. These would enhance the suggestion of the ways to resuscitate the foreign exchange market in Nigeria. 1. 10ORGANISATION OF OTHER CHAPTER: 2-5 The rest of this study shall contain four chapters. Chapter two would present the literature review on the subject matter.The methodology to be adopted in the study would be stated in chapter three. Chapter four shall focus on the presentation and interpretation of the regression results. The last chapter – chapter five, would present the summary of the findings, conclusion and appropriate recommendations. REFERENCES Alaba, O. B. (2003). â€Å"Exchange rate uncertainty and foreign direct inves tment in Nigeria†. Being a paper presented at the WIDER Conference on Sharing Global Prosperity, Helsinki, Finland, 6-7 September. Kandil, M. and Mirzaie, I. A. 2003). â€Å"The Effect of Exchange rate Fluctuations of Output and Prices: Evidence from Developing Countries. † IMF Working Paper, WP/03/200, October. MacDonald, R. (1997). â€Å"What determines Real Exchange Rates? The Long and Short of it†. IMF Research Paper, WP/97/21, January. CHAPTER TWO LITERATURE REVIEW 1. INTRODUTION Exchange rate fluctuations and their effects on macro economic variables have generated an economics debate on the desirability of exchange rate policy. In judging the desirability of exchange rate fluctuations, it ecomes, necessary to evaluate their effects on output, price level and other macro economic parameter. Demand and supply channels determine the effects. The justification for this study was amply exemplified by the observation of the Secretary to the Government of the Fed eration of Nigeria, Ekaette, (2002). According to him, continuous depreciation of the Naira has encouraged currency speculation which unscrupulous individuals would naturally prefer to productive activity, leading to the diversion of invest able funds to non-productive activities.In the same vein, the former Governor of the Central Bank of Nigeria (CBN) Sanusi, (2002) stated that the choice of exchange rate regime is a critical issue. Suffice it to say that the current high interest rate structure represents the opportunity cost which the economy is paying for a misaligned exchange rate regime, indicative of the structural imbalance in the economy. The ultimate aim of this chapter is to present diversified views on the foreign exchange market and its mechanism and to also explain the exchange regimes of Nigeria as well as their effects on macroeconomic variables. 2.VARIOUS VIEWS ON EXCHANGE RATE FLUCTUATIONS IN THE FOREIGN EXHANGE MARKET According to Kandil and Mirzaie (2003), unant icipated exchange rate may be the result of a change in agents’ rational forecast, under a fixed exchange rate regime, or the result of an unexpected movement in the exchange rate, under a flexible rate regime. They noted that in line with theory’s prediction, the effects of unanticipated exchange rate fluctuations on output and prices may be positive or negative across countries, according to the relative effects of currency fluctuations on the supply and demand of the respective countries.On the hand, Kandil and Mirzaie (2003) opined that movements in the exchange rate that are consistent with agents’ expectations have limited effects on the macro economy. They however, noted that in many developing countries, high variability of exchange rate fluctuations around its anticipated value may generate adverse effects in the form of higher price inflation and larger output contraction. Rutasitara, L. (2004) observed that the parallel market exerted greater influenc e on the exchange rate during periods of shortage and controls; it disappeared as further liberalization took hold.He argued that while a more or less â€Å"stable† nominal exchange rate is desirable for trade and investment decisions, it is more important to maintain the rate at sustainable levels. He noted that the level and prospects of the foreign reserves position are important in this respect. He advised that output and export strategies to ensure a well supplied foreign exchange market need to be furthered. The supply of foreign currency would also include foreign grants and/or loans. Cheong, (2004) noted that the higher moments in the exchange rate is non-constantly varied with clustering.He investigated a possible effect of risk in exchange rates on import trade in the UK. The empirical results show that uncertainty in exchange rates negatively affects international trade and, more importantly, the effect is statistically significant. Buffie, etal. (2004) focused on the management of highly persistent shocks to aid flows in three â€Å"post-stabilization† African economies with de jure flexible exchange rates. Such shocks were found to have beneficent long-run effects. He however noted that when currency substitution is high they can produce dramatic macroeconomic management problems in the short run.Alaba, (2003) argued that the parallel market exchange rate is the more important driver of activities in the Nigerian economy. He therefore noted that proper management of exchange rate, to forestall costly distortions, constitutes an important pillar in determining flow of FDI to Nigeria and indeed Sub-Sahara African countries. He opined that it is important that monetary authorities ensure transparency in determining exchange rate process such that various economic distortions associated with exchange rate may be minimized. 3. EFFECTS OF FOREIGN EXCHANGE MARKET INSTABILITYKandil, (2004) investigated the effect of exchange rate fluctuation s on economic performance in developing countries. The investigation presented a theoretical model that decomposed movements in the exchange rate into anticipated and unanticipated components. Anticipated exchange rate depreciation determines the cost of imported intermediate goods and, hence, the output supplied. In contrast, unanticipated currency fluctuations determine aggregate demand through exports, imports, and the demand for currency, and determine aggregate supply through the cost of imported intermediate goods.The first channel increases aggregate demand; currency depreciation increases exports and decreases imports. The second channel decreases aggregate demand. On the supply side, Kandil, (2004) explains that currency depreciation increases the cost to buy intermediate goods and decreases the output supplied. The combined effects of the three channels are indeterminate on output and price. The paper investigates the effects of exchange rate fluctuations (both anticipated and unanticipated) using output and price data for a sample of twenty-two developing countries.Kandil, (2004) concluded that for a varying degree of openness, exchange rate fluctuations generate adverse effects on economic performance in a variety of developing countries. These effects are evident by output contraction and price inflation in the face of currency depreciation. Indeed, concerns about the adverse effects of exchange rate depreciation on economic performance are supported by the evidence of macroeconomic performance for a sample of twenty-two developing countries.For policy implications, Kandil, (2004) suggests that exchange rate policies should aim at minimizing unanticipated currency fluctuations to insulate economic performance from the adverse effects of this variability in developing countries. Osakwe, (2002) examined the choice of exchange rate regime using a speculative attack model that took into account the real effects of unanticipated changes in real exchang e rates. It also incorporated two features that played prominent roles in recent currency crises in emerging markets: currency substitution and volatile capital flows.The two approaches were applied to incorporate the real effects of unanticipated changes in exchange rates into standard models of exchange rate regimes. In the first approach, the effects were introduced directly by assuming that the monetary authority’s loss function depended exclusively on the variance of real output but that aggregate demand or output depended, among other factors, on the deviation of actual from expected changes in the real exchange rate.In the second approach, the real effects of unanticipated exchange rate changes were incorporated indirectly by assuming that the monetary authority’s loss function depended on the variance of real output as well as the variance of the real exchange rate. It was concluded that the traditional models of exchange rate regimes ignore the destabilizing e ffects of sharp and unanticipated exchange rate movements. Odusola and Akinlo, (2001) focused on the link among the naira depreciation, inflation, and output in Nigeria.Evidence from their study revealed the existence of mixed results on the impacts of the exchange rate depreciation on the output. They observed that the impulse response functions exerted an expansionary impact of the exchange rate depreciation on the output in both medium and long terms. The opposite (contractionary impact) was however observed for the short-term horizon. These results tend to suggest that the adoption of a flexible exchange rate system does not necessary lead to output expansion, particularly in the short term.They noted that issues such as discipline, confidence, and credibility on the part of the government are essential. However, these issues are apparently lacking in Nigeria, as partly reflected in several policy reversals. Dekle (2002) developed a model of an exporting firm that experiences fl uctuating exchange rates and shocks to its cash flow. The firm uses its cash flow and borrows from the financial markets to produce for export later in the period. They noted that exchange rate and shocks to cash flows are correlated, but the correlation could be positive or negative.If, for example, they are negatively correlated, then the firm will suffer from low cash flows when its exchange rate is depreciated. That is, the firm’s production will be constrained exactly at the time when its export opportunities are greatest. This provides the rationale for the firm to hedge against shocks to its cash flow. Dekle (2002) related nominal exchange rates to export volumes at the firm level and finds that export volumes are strongly affected by changes in exchange rates. As in earlier work, they too found that prices are sticky in the buyer’s currency.In their model of exports, the strong response of export volumes to exchange rate fluctuations arises not because of chang es in the buyer’s currency prices, but because of a loosening of financing constraints, either through the direct beneficial effect of exchange rate shocks on cash flows, or through hedging activities. Uncertainty in exchange rates which immediately followed the collapse of the Bretton Woods system may be decomposed into two components. The first reflects systematic movement of the exchange rate and the second, exchange volatility (Darby et al. , 1999).Exchange rate volatility is usually taken as some measure of the dispersion of the rate over some period of time. Volatility of the rate impacts on growth through a variety of channels, including investment and trade. Interest in exchange rate uncertainty on investment stems from the standard result in option pricing theory, which suggests that the value of an option increases with an increase in the underlying volatility of the stock (Accam, 1997). Kosteletou and Liargovas (2000) studied the direction of effects of exchange ra te variability on the pattern and flow of investment.The study suggests that in theory, there is no clear cut distinction concerning the direction of such a relationship. It identifies at least six competing models in the literature, categorised under the trade integrated models and models of financial behaviour. The first category according to Kosteletou and Liargovas (2000) distinguishes between the traded and non-traded goods model. The second category distinguishes between the monetary approach to balance of payments, the strategic behaviour of international firms, the imperfect-capital-market theory and relative labour cost theory.The first hypothesis (model) suggests that for a developing country which is a price taker, an exogenous inflow of capital will lead to exchange rate appreciation or depreciation, depending on whether foreign exchange is used to finance domestic spending or capital accumulation in the traded and non-traded sector. The second model is the model of fina ncial behaviour. According to the (portfolio) model, financial and capital liberalisation in countries result in increase in total inflows and outflows.The proliferation of exchange rate systems, especially in developing countries which restricted the forces for long, suggest that further attention should be given to the degree to which these regimes influence the behaviour of economic fundamentals, including the flow of investment. The question of what exchange management strategy a country wishing to encourage foreign flows of investment should adopt is still unclearly resolved in the literature. Accam (1997) reviews the effect of exchange rate instability on macroeconomic performance with specific reference to the effects on investment and trade.In the survey, Fiani and de Melo (1990) found that unstable macroeconomic environment constitutes one of the major impediments to investment in many Less Developed Countries (LDCs). The authors estimate an OLS regression of the fixed coun try effects of total and private investment in 20 countries using the standard deviation of the exchange rate as a proxy for instability. The study finds a negative sign associated with the coefficient of exchange rate uncertainty. Serven and Solimano (1992), also investigates economic adjustment and nvestment performance for 15 developing countries using the pooled cross-section time series data from 1975 to 1988. The investment equation estimated in the study used exchange rate and inflation as proxies for instability, and in each case, instability was measured by the coefficient of the variation of the relevant variables over three years. The two measures were found to be jointly significant in producing negative effect on investment. The same effect was confirmed by Hadjimicheal et al’s (1995) study on growth, savings and investment performance of 41 developing countries between 1986 and 1993.Goldberg (1993) considers the effects of exchange rate uncertainty on investment using conditional measure of volatility. The paper suggests that the sign of the effect of price variability on investment and industry profitability is unresolved in the theoretical literature primarily because the sign of the relationship depends on the balance of (i) negative effects of risk aversion of investors (ii) negative effects from investment irreversibility (iii) positive effects from profit convexity in prices (iv) negative effects from a profit and price uncertainty relationship that is possible under imperfect competition.The author concludes that the direction of effect of exchange rate uncertainty on investment activity remains an empirical question. Agenor (1991) using a sample of twenty-three developing countries, regressed output growth on contemporaneous and lagged levels of the real exchange rate and on deviations of actual changes from expected ones in the real exchange rate, government spending, the money supply, and foreign income. The results showed that s urprises in real exchange rate depreciation actually boosted output growth, but that depreciations of the level of the real exchange rate exerted a contractionary effect.Morley (1992) analyzed the effect of real exchange rates on output for twenty-eight devaluation experiences in developing countries using a regression framework. After the introduction of controls for factors that could simultaneously induce devaluation and reduce output including terms of trade, import growth, the money supply, and the fiscal balance, he observed that depreciation of the level of the real exchange rate reduced the output.Rodriguez and Diaz (1995) estimated a six-variable VAR – output growth, real wage growth, exchange rate depreciation, inflation, monetary growth, and the Solow residuals – in an attempt to decompose the movements of Peruvian output. They observed that output growth could mainly be explained by â€Å"own† shocks but was negatively affected by increases in exchan ge rate depreciation as well. Rogers and Wang (1995) obtained similar results for Mexico. In a five-variable VAR model – output, government spending, inflation, the real exchange rate, and money growth – most variations in the Mexican output resulted from â€Å"own† shocks.They however noted that exchange rate depreciations led to a decline in output. 2. 4EXCHANGE RATE REGIMES IN NIGERIA Ekaette, (2002) noted that one major challenge that had confronted this administration since it assumed office in May 1999 was how to quickly put the economy back on the path of sustainable growth. According to him, most of the banks are suspected to have abandoned real banking for â€Å"round tripping† (the diversion of official Foreign Exchange to the Parallel Market).Soleye, (1985) then Honourable Minister of Finance stated that conscious effort aimed at the management of the Nigerian foreign exchange resources began in 1962 with the inception of the Exchange Control A ct, which was directed at freeing the management of the Foreign Exchange from its erstwhile colonial pattern. Oyejide, (1985) stated that the Nigerian Pound was introduced in 1959. Its external value was fixed at par with the British Pound Sterling which, in turn, defined its United States Dollar(USD) value as $2 . 80.Nigeria joined the International Monetary Fund (IMF) after Independence, and the Nigerian Pound had its parity defined, in June 1962, in terms of Gold at one Nigerian Pound equals 2. 48828 grams of fine gold. This confirmed its original USD par value. Similarly, the exchange rate of the Nigerian Pound for the British Pound Sterling was determined via its gold parity. However, the sterling was devalued by 14. 3 per cent against its gold parity in November, 1967. Since Nigeria did not devalue in tandem, the value of the Nigerian Pound became 1. 17 British Pounds Sterling.The Naira replaced the Nigerian Pound as Nigeria’s currency in January 1973, its par value was set at half that of the pound. Hence the exchange rate became $1. 52 to the naira. The rigid relationship between the USD and the naira was terminated in April 1974; the fixed rate for sterling had been broken earlier in June 1972, when the sterling started to float officially. In February 1978, the system of determining the naira exchange rate against a basket of currencies of Nigeria’s main trading partners was finally adopted. According to Ugbebor (1998), the Oil glut of 1981 led to a crisis in the Foreign Exchange Market (FEM) in 1982.In December 1983 there was a change in government. With effect from January 1984 and again in May 1984 additional exchange control measures were introduced. Another change in government took place in August 1985. In September 1986, the Second-Tier Foreign Exchange Market (SFEM) was introduced. Under SFEM, the exchange rate was floated when it became obvious that a rigid or controlled exchange rate would not ensure internal balance. The prin ciples of the Structural Adjustment Programme (SAP) were adopted leading to a market – oriented approach to price determination.The Second –Tier rate was determined by auction at the SFEM using (a) the average rate pricing method, (b) the marginal rate pricing method, (c) the Dutch Auction System (DAS) which was introduced in April 1987, whereby the CBN bought and sold Foreign Exchange in this market and supplied the demand of the authorized dealers in full. The First-Tier rate was still applicable to Debt Service payments, other public sector disbursements and pre-SFEM transactions. The merger of the two markets in July 1987 to form an enlarged FEM was more technical than real.According to Akinmoladun (1990), the gap between the two rates began to grow shortly after. In January 1989, the DAS was re-introduced and the Dual Exchange Rate system FEM merged with the Inter-bank market to form IFEM. By March 1992 there was a complete floating of the naira. Another change in government in August, 1993 ushered in a new fixed exchange rate. In 1995, the Autonomous Foreign Exchange Market (AFEM) was introduced, under a policy which allowed for Central Bank of Nigeria intervention on a predetermined basis instead of arbitrarily.Under AFEM, Bureaux De Change would buy and sell from privately-sourced Foreign exchange at the AFEM rate. The fixed exchange rate was reserved for public sector use. In 1993, the Parallel Market and Bureaux de Change exchange rates were almost double the devalued First-Tier rate for the naira. The authorities saw this as a signal of a depreciation trend which needed correction. This led to a re-introduction of a fixed exchange rate which pegged the naira at N21. 996 to $1 in 1994. In January 1997, the naira was formally pegged and a pro rata system of FE allocation to end- users was adopted.The Foreign Exchange Market was further liberalized in October, 1999 with the introduction of an Inter-bank Foreign Exchange Market (IFEM). 2. 5STRUCTURE OF FOREIGN EXCHANGE MARKET IN NIGERIA The exchange control system was unable to evolve an appropriate mechanism for foreign exchange allocation in consonance with the goal of internal balance. This led to the introduction of the Second-tier Foreign Exchange Market (SFEM) in September, 1986. Under SFEM, the determination of the Naira exchange rate and allocation of foreign exchange were based on market forces.To enlarge the scope of the Foreign Exchange Market Bureaux de Change were introduced in 1989 for dealing in privately sourced foreign exchange. As a result of volatility in rates, further reforms were introduced in the Foreign Exchange Market in 1994. These included the formal pegging of the naira exchange rate, the centralisation of foreign exchange in the CBN, the restriction of Bureaux de Change to buy foreign exchange as agents of the CBN, the reaffirmation of the illegality of the parallel market and the discontinuation of open accounts and bills for collection as means of payments sectors.The Foreign Exchange Market was liberalised in 1995 with the introduction of an Autonomous Foreign Exchange Market (AFEM) for the sale of foreign exchange to end-users by the CBN through selected authorised dealers at market determined exchange rate. In addition, Bureaux de Change were once more accorded the status of authorized buyers and sellers of foreign exchange. With the failure of the Autonomous Foreign Exchange Market (AFEM), the Foreign Exchange Market was further liberalized in October, 1999 with the introduction of an Inter-bank Foreign Exchange Market (IFEM).The IFEM was designed as a two-way quote system, and intended to diversify the supply of foreign exchange in the economy by encouraging the funding of the inter-bank operations from privately-earned foreign exchange. The IFEM also aimed at assisting the naira to achieve a realistic exchange rate. The operation of the IFEM, however, experienced similar problems and setbacks as the AFEM, ow ing to supply-side rigidities, the persistent expansionary fiscal operations of government and the attendant problem of persistent excess liquidity in the system. The peculiarity of the Nigerian foreign exchange market needs to be highlighted.The country’s foreign exchange earnings are more than 90 per cent dependent on crude oil export receipts. The result is that the volatility of the world oil market prices has a direct impact on the supply of foreign exchange. Moreover, the oil sector contributes more than 80 per cent of government revenue. Thus, when the world oil price is high, the revenue shared by the three tiers of government rise correspondingly and, as has been observed since the early 1970s, elicited comparable expenditure increases, which had been difficult to bring down when oil prices collapse and revenues fall concomitantly.Indeed, such unsustainable expenditure level had been at the root of high government deficit spending. It is therefore important that rese rves be built up when the price is high to cushion the effect of revenue shortfall on government spending when oil price falls in the international oil market. Specifically, the sustained demand pressure and the consequent depreciation of the naira exchange rate under the IFEM were traced to the following causes. ? Limited sources of foreign exchange supply.In particular, the anticipated supplies from autonomous sources, such as oil companies, banks and non-bank financial institutions were significantly below what was required to broaden and deepen the market; ? The excess liquidity in the system induced by the transfer of government accounts from the CBN to banks and the huge extra-budgetary spending in 1999 on unproductive ventures; ? The heavy debt service burden; and ? Speculative demand, driven by uncertainties created by social and political unrest, expectations of future depreciation of the naira, as well as the deterioration of the external sector position.It became a matter of serious concern that despite the huge amount of foreign exchange, which the CBN supplied to the foreign exchange market, the impact was not reflected in the performance of the real sector of the economy. Arising from Nigeria’s high import propensity of finished consumer goods, the foreign exchange earnings from oil continued to generate output and employment growth in other countries from which Nigeria’s imports originated. This development necessitated a change in policy on 22nd July 2002, when the demand pressure in the foreign exchange market intensified and the depletion in external reserves level persisted.The CBN thus, re-introduced the Dutch Auction System (DAS) to replace the IFEM. The DAS was designed to achieve a realistic exchange rate of the naira that will stem the excessive demand for foreign exchange, conserve the dwindling external reserves and achieve a realistic exchange rate for the naira. The DAS was conceived as a two-way auction system in whic h both the CBN and authorised dealers would participate in the foreign exchange market to buy and sell foreign exchange. The CBN was expected to determine the amount of foreign exchange it is willing to sell at the price buyers are willing to buy.The marginal rate, which by definition is the rate that clears the market, represents the â€Å"ruling† rate at the auction. Since its introduction in July 2002, the DAS has been largely successful in achieving the objectives of the monetary authorities. Generally, it has assisted in narrowing the arbitrage premium from double digit to a single digit, until the emergence of irrational market exuberance in the fourth quarter of 2003. Secondly, the DAS has enhanced the relative stability of the naira, vis-a-vis the US dollar-the intervention currency.Specifically, the naira has fluctuated within a single digit band, since the DAS was introduced in July 2002. Thirdly, it has also assisted in stemming the spate of capital flight and curb ing rent-seeking amongst market operators. REFERENCES Accam B. (1997). â€Å"Survey of Measurement of Exchange Rate Instability†, Mimeo. Agenor, Pierre-Richard (1991). â€Å"Output, Devaluation and the Real Exchange Rate in Developing Countries. † Weltwintschaftliches Archiv vol. 127, no. 1, pp. 18–41. Akinmoladun, O. (1990). â€Å"An Appraisal of Foreign Exchange Management in Nigeria since the introduction of the Structural Adjustment Programme†.Proceedings of the 1990 One –Day seminar Published by the Nigerian Economic Society PP 29 – 69. Alaba, O. B. (2003). â€Å"Exchange rate uncertainty and foreign direct investment in Nigeria†. Being a paper presented at the WIDER Conference on Sharing Global Prosperity, Helsinki, Finland, September. Betts, C. M. and Kehoe, T. J. (2001). â€Å"Tradability of Goods and Real Exchange Rate Fluctuations. † Paper presented at a seminar, January. Buffie, E. , Adam, C. , Connell, S. and Pattil lo, C. (2004). â€Å"Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa†.IMF Working Paper WP/04/216, November. Cheong, C. (2004). â€Å"Does the risk of exchange rate fluctuation really affect international trade flows between countries?. † Economics Bulletin, Vol. 6, No. 4, pp. 1? 8. Available at http://www. economicsbulletin. com/2004/volume6/EB? 04F10002A. pdf Darby J. , Hallet, A. H. , Ireland, J. and Piscitelli, L. (1999). â€Å"Exchange Rate Uncertainty and Business Sector Investment†, Paper Prepared for a Workshop on â€Å"Uncertainty and Factor Demand† Hamburg, August. Dekle, R. , (2001). â€Å"Exchange Rates and Corporate Exposure: Evidence from Japanese Firm Level Data†, mimeo.Ekaette, U. J (2002). â€Å"Monetary Policy and Exchange Rate Stability†, Proceedings of a One day Seminar held on 23 May 2002, Federal Palace Hotel, Lagos. Publisher: The Nigerian Economic Society. Pp (ix) – (xi). Goldberg L. S. (1993). â€Å"Exchange Rates and Investment in United States Industry†. Review of Economics and Statistics vol. LXXV: pp. 575-88. Kandil, M. (2004). â€Å"Exchange rate fluctuations and economic activity in Developing countries: theory and evidence†. Journal of Economic Development, vol. 29, No. 1, June. Kandil, M. and Mirzaie, I. (2003). The effects of Exchange rate fluctuations on Output and Prices: Evidence from developing countries. † IMF Working Paper WP/03/200, October. Kosteletou N. and Liargovas, P. (2000), â€Å"Foreign Direct Investment and Real Exchange Inter-linkages†, Open Economies Review vol. 11: pp. 135-48. Morley, S. A. (1992). â€Å"On the Effect of Devaluation During Stabilization Programs in LDCs. † Review of Economics and Statistics vol. 74, No. 1, pp. 21–27. Odusola, A. F. and Akinlo, A. E. (2001). â€Å"Output, Inflation and Exchange rate in Developing Countries†. The Developing Economies, vol. 34 (2), June. Osakwe, P. N. 2002). â€Å"Currency Fluctuations, Liability Dollarization, and the Choice of Exchange Rate Regimes in Emerging Markets†. Bank of Canada Working Paper 2002-6, February. Oyejide, T A. (1985). â€Å"Exchange Rate Policy for Nigeria: Some options and their consequences†. Proceedings of the 1985 One-Day Workshop Published by the Nigeria Economic Society pp 17 – 32. Rowland, P. (2003). â€Å"Forecasting the USD/COP Exchange Rate: A Random Walk with a Variable Drift’ (A paper downloaded from the internet). Rutasitara, L. (2004). â€Å"Exchange rate regimes and inflation in Tanzania. † AERC Research Paper 138, February.Soleye, O. O. (1985). Proceedings of the 1985 One-Day Workshop Published by the Nigeria Economic Society pp. 15 – 16. Ugbebor, C. O. (1998). â€Å"Development of the Nigerian Foreign Exchange Market (An overview)†, an original essay submitted to the Department of Economics, Unversity of Ibadan. CHAPT ER THREE RESEARCH METHODOLOGY 3. 1INTRODUCTION This chapter explains the various techniques used in collecting data for this study. It also provides the background against which the study is being carried out and it also states the extent to which the findings can be generalised. . 2RESEARCH DESIGN This research work intends to empirically examine the Nigerian foreign exchange market. It shall consider the influence of fluctuations in the exchange rate on major macroeconomic variables in Nigeria. The study shall focus mainly on the relationship that exists between exchange rate, economic growth, foreign trade, external reserve and the domestic prices of goods and services in Nigeria. Regression analysis method shall be employed to investigate the relationship between the specified variables with data spanning between 1980 and 2005. 3. RESEARCH QUESTIONS The study shall examine the following questions: 1. What are the determinants of foreign exchange rates? 2. What has been the impac t of foreign exchange rate on the growth of Nigerian economy? 3. How does the foreign exchange rate impacts on foreign trade of Nigeria? 4. What is the relationship between foreign exchange rate and external reserve? 5. How does the exchange rate affects the domestic prices of goods and services in Nigeria? 3. 4RESEEARH METHODOLGY 3. 4. 1 SOURCES OF DATA Secondary data shall be the basis for data analysis in this study.We shall rely much on the various publications of Central Bank of Nigeria (CBN): Statistical Bulletin, Annual Reports and Financial Reports, Federal Office of Statistics (FOS) annual reports (FOS), Conference papers, journals etc. The variables for which data would be sourced include: Exchange Rate, Gross Domestic Product, Balance of Trade, External Reserve and Consumer Price Index. 3. 4. 2 TECHNIQUE OF DATA ANALYSIS We shall employ econometric technique to estimate the parameters of the various economic relationship established in our models.The Econometric approach that would be adopted to examine impact of foreign exchange market operations on macro economic variables in Nigeria shall be the Vector Autoregressive Model (VARM) method. This econometric method would be used because it is very reliable and widely used in researches. The test of the hypotheses earlier stated would be done at 5% level of significance and as such, the generalization of the study findings would be limited to this extent. 3. 5MODEL RE-SPECIFICATION MODEL I gdp = a0 + a1 exr + e Where gdp-Gross Domestic Product exr -Exchange rate 0 and a1 -Parameters e -Error term MODEL II bot = b0 + b1 exr + e Where bot-Balance of trade exr -Exchange rate b0 and b1 -Parameters e -Error term MODEL III exrev = c0 + c1 exr + e Where exrev-External reserve exr -Exchange rate c0 and c1-Parameters e -Error term MODEL IV cpi = d0 + d1 exr + e Where cpi -Consumer price Index exr -Exchange rate d0 and d1-Parameters e -Error term MODEL V gdp = e0 + e1 exr + e2 bot + e3 exrev + e4 cpi + e Where exr -Exchange rate bot-Balance of trade xrev-External reserve cpi -Consumer price Index e0, e1, e2, e3 and e4 -Parameters e -Error term 3. 6A’ PRIORI EXPECTATION Economic A’ Priori Criteria: This refers to the sign and size of the parameters in economic relationships. MODEL I gdp = a0 + a1 exr + e It is expected that a0 > 0 and a1 < O Exchange rate is the price of a currency in terms of another currency while gross domestic product is the value of the goods and services produced in a country within a specific period of time. Exchange rate is expected to affect the gross domestic product negatively.A high exchange rate would not allow for the importation of capital goods that are need for productive activity, thereby impair economic growth. This is based on neoclassical trade models. MODEL II bot = b0 + b1 exr + e It is expected that b0 > 0 and b1 > O Balance of trade is the net difference between total export and import. The relationship between exchange rate and balan ce of trade is expected to be positive negative. This is because a high exchange rate would encourage exportation and discourage importation and thereby making the balance of trade favourable i. positive (when export is higher than import). MODEL III exrev = c0 + c1 exr + e It is expected that c0 > 0 and c1 < 0 External reserve is the amount of money which a country holds in foreign currency. It represents the savings of a nation. It is often accumulated from the proceeds from external trade. A high exchange rate would mean that a country would have to pay more to pay for the goods and services from other countries and as a result would not have much as external reserve. So the relationship between exchange rate and external reserve is expected to be negative.MODEL IV cpi = d0 + d1 exr + e It is expected that d0 > 0 and d1 > O Consumer price index is a measure of the general price level in an economy and as such an indicator of the standard of living of the people. A high exchange r ate would impair production causing the general price level to rise. Therefore, the relationship between exchange rate and consumer price level is expected to be direct i. e positive. MODEL V gdp = e0 + e1 exr + e2 bot + e3 exrev + e4 cpi + e Where exr -Exchange rate bot-Balance of trade exrev-External reserve cpi -Consumer price Index 0, e1, e2, e3 and e4 -Parameters e -Error term It is expected that e0 > 0, e1 < 0 e2> 0 e3 > 0, e4 > 0 According to the neoclassical trade model, exchange rate is expected to affect the gross domestic product negatively. A high exchange rate would not allow for the importation of capital goods that are need for productive activity, thereby impair economic growth. Balance of trade represents the net trade. A favourable balance of trade (i. e net export) would increase the gross domestic product. So balance of trade would vary directly with the gross domestic product.The external reserve is also expected to have positive relationship with the external r eserve. High external reserve would stabilize the foreign exchange market which therefore creates conducive environment for improved production and trade. Consumer price index is an indicator of the standard of living of the people. A high standard of living is expected to increase labour productivity and thereby stimulating growth. So consumer price index would vary directly with the gross domestic product. A high exchange rate would impair production causing the general price level to rise.Therefore, the relationship between exchange rate and consumer price level is expected to be direct i. e positive. STATISTICAL CRITERIA This aims at the evaluation of the statistical reliability of the estimates of the parameters. In this line, the â€Å"t-statistics† will be employed to test the hypotheses concerning the true values of the population parameters a1, a2 and a3. The â€Å"R2 – Statistics is also employed as the coefficient for determination to measure the goodness o f fit of the regression line to the observed samples values of the variable while the â€Å"F-statistics† will also be used to test the overall significance of the regression.ECONOMETRIC CRITERIA It aims at detecting the violation or validity of the assumption of the econometric method employed (i. e. OLS). To test the validity of the assumption of non-correlated disturbances, the â€Å"Durbin Watson Statistics† would be used in the evaluation of the results of estimates. REFERENCES Koutsoyiannis A. (1991), Theory of Econometrics, Hampshire: Macmillan Limited Ogede P. O. (1999), Undergraduate Econometrics, Lagos: Minerib, Accord Limited Robert S. Pindyck and Daniel L. Rubinfeld (1998), Econometric Models and Economic forecasts, Singapore: Irwin McGraw-Hill. CHAPTER FOUR PRESENTATION AND ANALYSIS OF DATA . 1INTRODUCTION The hypotheses were formulated with data spanning the period between 1980 and 2005. All the data for estimation were obtained from the publications of t he Central Bank of Nigeria (CBN) and Federal Office of Statistics (FOS). The choice of statistics adopted in this chapter is the regression and analysis of variance. The variance of the estimate is obtained by multiplying the standard error with the square reciprocal of the derivative i. e variance. The traditional test of significance of the parameter estimates is the standard error test, which is equivalent to the student’s t–test.The correlation coefficient (r) shows the relationship between the variables. The relationship could be of a direct, indirect or an outright zero correlation. The standard error is obtained by taking the inverse of the variance of the estimate. The standard errors for the estimate of a1, b1 etc. will be dealt with in this project. The standard error for the estimates a0 and b0 are left out. The F-Ratio is used to determine the overall significance of the regression models i. e. to determine the extent to which the variations in the dependen t variable can be attributed to changes in the explanatory variables.This test shall be used to measure the extent of the claimed relationship between the exchange rate, gross domestic product, balance of trade, external reserve and consumer price. F-ratio would also be used to test for causality between the variables. The coefficient of determination (R2) is used to determine the overall significance of the model just like the F-ratio. A high coefficient of determination signifies that the regression model is statistically significant, meaning that there is high relationship between the dependent variables and the interdependent variables. 4. 2PRESENTATION OF REGRESSION RESULTSMODEL I gdp = a0 + a1 exr gdp = 81582. 54 + 445. 356ex t – statistic (27. 07) (8. 573)a Std. Error (3013. 762) (51. 946)* F-Ratio -73. 503 R2-0. 762 R2-0. 751 D-W-0. 536 N-25 d. f-N – K = 25 – 2 = 23 * Figures in parentheses are the standard errors a – Significant at 5%. Source: Co mputed by Author from SPSS Regression Results MODEL II bot = b0 + b1 exr bot = -11771. 2 + 8652. 278 exr t – statistic (-0. 129) (5. 491)a Std. Error (91420923) (1575. 762)* F-Ratio -30. 49 R2-0. 567 R2-0. 548 D-W-1. 298 N-25 d. f-N – K = 25 – 2 = 23 * Figures in parentheses are the standard errors a – Significant at 5%. Source: Computed by Author from SPSS Regression Results MODEL III exrev = c0 + c1 exr exrev = -66440. 5 + 11080. 057exr t – statistic (-1. 190) (11. 509)a Std. Error (55854. 58) (962. 729)* F-Ratio -132. 457 R2-0. 852 R2-0. 846 D-W-1. 608 N-25 d. f-N – K = 25 – 2 = 23 * Figures in parentheses are the standard errors a – Significant at 5%. Source: Computed by Author from SPSS Regression Results MODEL IV pi = d0 + d1 exr cpi = 313. 623 + 40. 736 exr t – statistic (1. 69) (12. 737)a Std. Error (185. 548) (3. 198)* F-Ratio -162. 242 R2-0. 876 R2-0. 870 D-W-0. 727 N-25 d. f-N – K = 25 – 2 = 23 * Figures in parentheses are the standard errors a – Significant at 5%. Source: Computed by Author from SPSS Regression Results MODEL V gdp = e0 + e1 exr + e2 bot + e3 exrev + e4 cpi gdp = 77374. 9 + 140. 6exr + 0. 007bot – 0. 061exrev + 10. 28cpi t – statistic(-0. 243) (-1. 364)a (1. 258)a (-0. 013)a (3. 19)a Std. Error (33. 074) (0. 23)* (0. 76)* (0. 000)* (0. 000)* F-Ratio -35. 732 R2-0. 877 R2-0. 853 D-W-1. 082 N-25 d. f-N – K = 25 – 5 = 20 * Figures in parentheses are the standard errors a – Significant at 5%. Source: Computed by Author from SPSS Regression Results 4. 3INTERPRETATION AND ANALYSIS OF RESULTS MODEL I Going by the results of the regression, there is a positive relationship between exchange rate and the gross domestic product (GDP). But this result is not in consonance with the a priori expectation earlier stated. Since the standard error of the parameter estimate S. . (a1): 51. 946 is less than half of the parameter estimat e (a1/2): 222. 678, we shall therefore reject the null hypothesis and accept the alternative hypothesis. This indicates that the parameter estimate is statistically significant. The theoretical t-value at 5% level of significance with twenty-three degree of freedom is 1. 714. The theoretical t-value is less than the calculated t-value (8. 573); we shall therefore reject the null hypothesis and accept the alternative hypothesis. This implies that the parameter estimate (exchange rate) is statistically different from zero i. e. t is a relevant variable for the determination of the gross domestic product in Nigeria. The coefficient of determination gives 0. 762 or 76. 2% meaning that the regression model is 76. 2% significant i. e the variations in the dependent variable i. e. the gross domestic product is 76. 2% attributable to the changes in the independent variable i. e exchange rate. This result confirms the significance of the exchange rate in the determination of the gross domest ic product of Nigeria. The calculated F-value (73. 503) is less than the critical F-value at 5% level of significance with v1 = 1 and v2 = 23 (4. 8). We shall therefore reject the null hypothesis and accept the alternative hypothesis. This signifies that the overall regression or relationship between the gross domestic product and exchange rate is significant. This analysis revealed to us that exchange rate is a major determinant of the level of productivity in Nigeria. Besides, exchange rate was found to vary directly with the gross domestic product. MODEL II From the results of the second regression, it is evident that there is also positive relationship between the exchange rate and balance of trade.This relationship conforms with the a’ priori expectation. The standard error of the parameter estimate S. e. (b1): 1575. 762 is less than the half of the parameter estimate (b1/2):4326. 139. We shall therefore reject the null hypothesis and accept the alternative hypothesis. T his indicates that the parameter estimate is statistically significant. The theoretical t-value at 5% level of significance with twenty-three degree of freedom is 1. 714. On comparing with the computed t-value, the critical t-value is less than the calculated t-value (5. 491).We shall therefore reject the null hypothesis and accept the alternative hypothesis meaning that the parameter estimate i. e exchange rate is statistically different from zero i. e. it affects the dependent variable – balance of trade. In this model the coefficient of determination gives 0. 567 or about 57%. This shows that the regression model is 57% significant i. e the variation in the balance of trade is 57% attributable to the changes in the independent variable. The calculated F-value (30. 149) is less than the critical F-value at 5% level of significance with v1 = 1 and v2 = 23 (4. 28).We shall therefore reject the null hypothesis and accept the alternative hypothesis. This means that the overall regression or relationship between the exchange rate and the balance of trade is statistically significant i. e there is causality between the two variables. MODEL III The result of the third regression was not in consonance with what was expected. The results showed a positive relationship between the external reserve and the exchange rate. This could be attributed to import reduction strategy of the government over the years. For the standard error test, the standard error of the parameter estimate S. . (c1):962. 729 is less than the half of the parameter estimate (c1/2):5540. 02. We shall therefore reject the null hypothesis and accept the alternative hypothesis. This shows that the parameter estimate is statistically significant. The theoretical t-value at 5% level of significance with twenty-three degree of freedom is 1. 714. The theoretical t-value is less than the computed t-value; 11. 509; so that we reject the null hypothesis and accept the alternative hypothesis; implying that the parameter estimate (exchange rate) is statistically different from zero i. . it is a relevant variable for the determination of the external reserve of the country. The coefficient of determination shows 0. 852 or 85. 2% meaning that the regression model is about 85% significant i. e the variation in the dependent variable i. e. external reserve is 85% attributable to the changes in the independent variable i. e exchange rate. The computed F-value (132. 457) is greater than the critical F-value at 5% level of significance with v1 = 1 and v2 = 23 (4. 28). We shall therefore reject the null hypothesis and accept the alternative hypothesis.This signifies that the overall regression between the exchange rate and external reserve is also significant. MODEL IV Like the previous regression results, changes in the explanatory variable (exchange rate) in this model had positive effect on the consumer price index. This result is in consonance with the a priori expectation. The standa rd error of the parameter estimate S. e. (d1): 3. 198 s less than the half of the parameter estimate (d1/2):20. 368. We shall therefore reject the null hypothesis and accept the alternative hypothesis. This means that the parameter estimate – exchange rate is statistically significant.From the t-table, the theoretical t-value at 5% level of significance with twenty-three degree of freedom is 1. 714. In respect of the parameter estimate – exchange rate, the theoretical t-value is less than the calculated t-value (12. 737), we shall therefore reject the null hypothesis and accept the alternative hypothesis. This implies that the parameter estimate is statistically different from zero. The coefficient of determination (R2) gives 0. 876 or 87. 6% meaning that the regression model has a good fit i. e the variations in the dependent variable i. e. consumer price index is 85. % attributable to the changes in the independent variable i. e exchange rate. The theoretical F-value at 5% level of significance with v1 = 1 and v2 = 23 is 4. 28. Since the calculated F-value (162. 242) is greater than the critical value, we shall reject the null hypothesis and accept the alternative hypothesis. This signifies that the overall regression or relationship between the exchange rate and consumer price index is significant so, the changes in the consumer price index can to a certain extent, be attributed to changes in the explanatory variable – exchange rate. MODEL VThe results of the last regression that examined the relationship between the gross domestic, exchange rate, balance of trade, external reserve and consumer price index shows that there is positive relationship between the gross domestic product and the explanatory variables except the external reserve. Also, the standard errors of all the parameter estimates are less than the half of the parameter estimates. We shall therefore reject the null hypothesis and accept the alternative hypothesis. This sh ows that the parameter estimates – exchange rate, balance of trade, external reserve and consumer price index are all statistically significant.This means that they are important factors that affect the value of the gross domesti

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