FORECASTING OF NAIRA-DOLLAR EXCHANGE RATES FROM GDP AND EXPORTS SERIES: EVIDENCE FROM VECM-VAR MODEL

Abstract

In practice, forecasting of multivariate time series variables cannot be achieved directly from the
Vector Error Correction Model (VECM). As a result, it is achieved through the help of the
Vector Error Correction Model-Vector Autoregressive (VECM-VAR) model, which is also a VAR
model derived from the VECM model. To demonstrate this, the forecasting dynamics of the
Exchange Rates (EXR) of Nigerian Naira (NGN) to United States Dollar (USD) was studied
using Gross Domestic Product (GDP) and Exports of Goods and Services (EGS) as predictors
through Vector Error Correction Model-Vector Autoregressive (VECM-VAR), which is the
short-run component of VECM. Pre-tests supported the VECM-VAR (2) model, indicating one
cointegrating equation among the natural logarithms of EXR, GDP, and EGS (lnEXR, lnGDP,
and lnEGS). The Error Correction Term (ECT) confirmed equilibrium adjustments in the lnEXR
equation. The study’s findings revealed a continuous depreciation trend for the Naira against the
United States Dollar.