Cost of Capital and Exchange Rate Nexus: An Autoregressive Distributed Lag Approach


  • Hilary Uchenna Onyendi
  • Chukwuma Samuel Alamba
  • John Ibeawuchi Osuji


Cost of capital, Currency rate, Real effective exchange rate, Interest rate parity


This study investigated the effect of cost of capital (interest rate) on exchange rate in Nigeria
from1981 to 2022. High rate of interest is expected to lead to a corresponding stronger currency
rate and trickles down to impact on the international rate of exchange. This appears to
ineffectual in Nigeria as the local exchange rate has been unpredictable and depreciating over
the years.This calls for investigation.The secondary data were sourced from the Central Bank of
Nigeria (CBN)Statistical bulletin of various issues.Both descriptive (mean, median, standard
deviation) and econometrical tools (unit root test, correlation test, auto regressive distributed
lag) were adopted for analysis.The Results showed that cost of capital have negatively and
insignificantlyaffected exchange rate of the domestic currency.The recommendations among
others include that the cost of capital should be allowed to be market- driven and freely
determined by invisible forces as against the boardroom determination of such rate by the
Central Bank of Nigeria.