Monetary aspects of exchange rate determination, macroeconomic issues of a resource price increase in LDCs : a case study
The impact of the world oil price increases of the early 1970s and those that occured in the 1980s, and the corresponding growth in revenue for the Nigerian economy had two major effects. First, it affected the official exchange rates and its determination, hence fiscal developments for the country. At the same time, the windfall also led to an unbalanced sectoral change within the economy. Both the internal and external economic situation since the oil shock had shown persistent imbalances requiring adjustments. In analysing the oil shock effect, a comprehensive assessment of the influences of exchange rates and structural adjustment problems employs the valuable strengths of the monetary approach aspects of exchange rates determination; particularly on the question of external payments adjustment and of inflation of domestic price levels. The function of exchange rate as an instrument of stabilization policy in an economy such as Nigeria is imperative. A relatively stable exchange rate standard in a world of significant variability is important in evaluating the impact of exchange rate changes on the economy; precisely because the financial infrastructures are at the developing state. When tight controls on the foreign trade sector also lead to the establishment of an unofficial market in foreign exchange, the question of stability would depend on which of the two markets adjust quicker. The market with the more rapid rate of adjustment can therefore provide a guide to exchange rate policy performance. In analysing the stuctural adjustments impact of the oil revenues, features of both national and global economic environment that are significant for macroeconomic performance, which are also proximately related to exchange rates determination are considered by using the dutch-disease framework. By laying emphasis on the fuction of exchange rates mechanism and the impact of the oil revenue increases at macroeconomic level, the large and persistent misalignment of real exchange rates and the general economic policies of the oil boom era are thus analysed in-depth.