Abstract:
The study examines the impact of interest rate differential and exchange rate move-ment on the dynamics of Nigeria's international private capital flows from 2010Q1to 2019Q4. It uses the interest rate parity theory and the Markov Switching TimeVarying Transition Probability Modelling approach. Findings show that interest ratedifferential does not explain the dynamics of aggregate capital and Foreign DirectInvestment (FDI) flows, but significantly explains Foreign Portfolio Investment (FPI)flows. Also, Movement in real exchange rate is significant in explaining outflows andinflows in FPI, and inflows in FDI, but neutral to aggregate capital flows. The studyconcludes that deviations from interest rate parity provides opportunities for interestrate and currency arbitrage in Nigeria but using aggregate capital flows mask thisevidence. The study therefore recommends that the CBN should focus on exchangerate stabilization policies, so as not only to discourage FPI reversal but to also en-hance FDI inflow. This can be done by putting in place foreign reserve accretionmeasures to boost the ability of the CBN to defend the Naira. The new policy ini-tiative on remittances is a right step in the right direction as it could boost externalreserve
