Asymmetric Effect of Exchange Rate Fluctuations on Domestic Credit in Nigeria: A Nonlinear Autoregressive Distributed Lag (NARDL) Analysis
DOI:
https://doi.org/10.5281/zenodo.23415228Keywords:
Exchange rate; domestic credit; asymmetry; NARDL; bank lending; Nigeria.Abstract
Nigeria’s naira has undergone repeated large adjustments, most recently through the foreign-exchange (FX) market reforms of 2023–2024, while private-sector credit remains a binding constraint on investment. Whether credit responds symmetrically to appreciation and depreciation is unresolved, although balance-sheet theory predicts that it should not. The study tests whether appreciation and depreciation of the naira have asymmetric short-run and long-run effects on domestic credit to the private sector. A symmetric ARDL model is compared with a NARDL model in which the log exchange rate is decomposed into cumulative depreciation and appreciation partial sums. Cointegration is tested with the bounds approach using critical values; asymmetry with Wald tests; dynamic multipliers trace the response of credit to depreciation and appreciation. Extensions include a multiple-threshold (size) decomposition, a dynamic OLS cross-check, recursive estimation, a mediation analysis, Toda–Yamamoto causality tests and an out-of-sample forecast comparison. Quarterly observations, 2000Q1–2025Q4. The bounds tests indicate a long-run relationship (F = 5.19; 5% upper bound 3.69). A 10% depreciation lowers credit by about 3.3% in the long run. The appreciation coefficient is positive, the opposite of the theoretical sign, and statistically indistinguishable from zero (p = 0.405). Long-run symmetry is not rejected (F = 2.41, p = 0.124) and short-run symmetry is not rejected (p = 0.865), but a dynamic OLS cross-check and several robustness specifications are less clear-cut. With only 15 appreciation quarters, the symmetry test has limited power, so non-rejection is weak evidence of symmetry. The results show that depreciation is costly for private credit: a 10% depreciation is associated with a long-run fall in credit of about 3.3%, most of it within a year, whereas the data cannot establish that appreciation restores it. Policy should therefore aim to contain disorderly depreciation, require banks to report the currency composition of their loans, monitor unhedged FX borrowing and stress-test loan books against 10% and 20% depreciations, while treating the appreciation channel as unproven.
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