Private Sector Profitability and Depreciation Pressure within Managed Floating Exchange Rate Regimes: Evidence from Nigeria

Abstract

I find evidence for persistence in depreciation related currency pressure in the Naira to US$ exchange rate with persistence exacerbated by private sector profitability. The empirical evidence shows the Central Bank of Nigeria (CBN) reins in depreciation pressure induced within the private sector using buyback yields on Treasury Bills. Given the resultant appreciation of the Naira limits profitability within the private sector, this somewhat reactionary policy to exchange rate management simultaneously enables the CBN to manage investment risk within Nigeria's banking sector. My findings indicate managed floating or alternative hybrid exchange rate regimes can be especially appropriate in countries within which currency values erode with private sector profitability. In such countries, my findings indicate it is advantageous for Central Banks to be responsible for both bank regulation and monetary policy.