This study probes the optimal response in managing exchange rate following its attendant impact on the economy. Thus, we investigated the effect of a failed defense of the value of the currency through the use of foreign reserves and a self-driven devaluation of exchange rate on inflows of Foreign Direct Investment (FDI), exports, and output in Nigeria, using the impulse response function from the vector error correction model. The result showed that failed defense of the value of the currency exerts less deleterious effects on FDI, exports and output compared to the self-driven devaluation of exchange rate.

Keywords: Currency Crises, Monetary Policy, failed defense, Self-driven devaluation.