Abstract

The paper investigates the impact of change in external reserve positions of Nigeria on domestic investment, inflation and exchange rates. Using a combination of Ordinary Least Square (OLS) and Vector Error Correction (VEC) methods, it was observed that change in external reserves in the country only influences Foreign Direct Investment (FDI) and exchange rates and no influence of it was found on domestic investment and inflation rates. The results suggest that there is the need for broader reserve management strategies that will aim at maximizing the gains from oil export revenue by utilizing more of these resources to boost domestic investment.

Key words: External reserve, inflation rate, exchange rate, vector error correction.