Journal of Economics, Management and Trade

This study applied annual data of capital flows and macroeconomic variables in the Nigerian economic environment, for a period of twenty-nine (29) years. The data were collated from the Central Bank of Nigeria statistics database, and the E-views8 statistical software was used to run the analysis. Our empirical findings from the Unit root test gave evidence of the stationary nature of the variables in their first differences at 5 percent level of Significance. The Johansen co-integration test also show that a long run equilibrium link exist among the variables. Furthermore, the granger causality test indicate both uni-directional and bi-directional causation amongst the variables. Uni-directional causality exists from interest rate (logINT) to foreign portfolio investment (logFPI); and inflation rate (logINF) to foreign exchange rate (logFEXR). Bi-directional causality exists from logINF to logINT and logINT to logINF. This goes to show that Interest rate affects Foreign Portfolio Inflows, and an upsurge in Foreign Exchange is due to Inflationary pressures; which also affects Interest rates. The study recommends that the Central Bank of Nigeria should put in place specific and appropriate fiscal and monetary policies to curb the rising exchange rate that affects the productive sectors of the economy. From the analysis, a rise in foreign exchange rate affects capital flows negatively which is not good for an optimal stock market performance. If checks and balances are well structured, then fluctuations in inflation rate, interest rate and foreign exchange rate will be minimal. Secondly, the study proves that when interest rate is to be fixed for economic activities, it has a signaling effect and thus there are swings in both inflation and interest rates; as investors will start rebalancing their portfolios more frequently. Thus, the government can check this by making their institutions stronger.