How Does Corruption Affect Currency Substitution? Evidence from Nigeria

Abstract

The article examines the impact of corruption on currency substitution in Nigeria over the 1986–2017 period, using the auto-regressive distributed lag and vector error-correction approaches. The results indicate that corruption and currency substitution are co-integrated. Moreover, corruption promotes currency substitution in the short run, which confirms the safe-haven hypothesis. An increase in income leads to an increase in currency substitution, which further supports the safe-haven hypothesis. Exchange rate depreciation tends to promote currency substitution, especially in the short-run. Finally, inflation and interest rate promote currency substitution in Nigeria. Therefore, it would be necessary for policymakers to explore ways of reducing corruption, ensure macroeconomic stability, foster the equitable distribution of growth and promote productivity to enhance savers’ confidence in the local currency.