causality result which produced the expected result with respect to the variable, and conclusion drawn from there.
In the same manner, the coefficient of exchange rate vulnerability (EXRV) investigated shows the evidence of self insurance or precautionary motive of foreign exchange reserve interacted positively with the level of foreign exchange reserve. The magnitude of the coefficient is 0.022495 and the probability value given as 0.8940. This shows that a 1% increase in exchange rate vulnerability will result in a 2% positive increase in the level of foreign exchange reserve. In other words, the more the flexibility in exchange rate, the more changes in the level of foreign exchange reserve. This finding is contrary to apriori expectation in the case of developed countries, but was consistent with developing economies like Nigeria. Because the overriding objective of developing countries in the context of foreign exchange reserve rest on the protection of domestic currency. Theoretically, exchange rate vulnerability (EXRV) reduces the level of foreign exchange reserve, due to constant intervention in the exchange market, the reserves level have to be depleted over time to stabilise it. Nigeria has persistently implemented fixed or partial flexible exchange rate policy, therefore continues to use foreign exchange reserve to maintain a stable rate. This was to protect the economy from external shock.
This is a reflection of the self insurance), than the transaction motives. Jebuni and Tutu (1999) stated that the motive of accumulating foreign reserve for developing countries is to mitigate the volatile exchange rate caused by the terms of trade and the vulnerability of financial openness.
The inclusion of trade openness was to account for the volume of trade into Nigeria given the economic, political and institutional environment .The coefficient of Trade Openness (TOPEN) positively influenced on the level of foreign exchange reserve in Nigeria. An increase in the index of trade openness by 1%, led to an increase in the level of foreign exchange reserves by 47%. This result agrees with the apriori
expectation of this variable. Theoretically, it is expected that the higher the degree of openness, the higher the inflow of foreign capital and hence a positive change in foreign exchange reserve.
Openness measures the ratio of international trade transaction to GDP. It also measures the extent to which an economy is open to other part of the globe. The integration of financial sector to the global world exposes it to all forms of capital inflows and outflows. In that process, foreign reserve levels will be affected positively.
This means that openness during the period of this study enhances trade flows and the ultimate dynamics in foreign exchange reserve in Nigeria.
The coefficient of Net export (NEXPT) is found to be positive in relation to level of foreign exchange reserve with the coefficient magnitude of 0.000038 and statistically significant too at 10% level. This shows that a 1% increase in net export, led to a positive change in the level of foreign exchange reserve, though the magnitude of the coefficient was weak but was positive, statistically. It complied with the apriori-expectation and the theory of export led growth. The result is attributed to export performance in the non-oil and majorly with oil export and policies that encourage economic growth, particularly now that Nigeria has embraced the tenets of democratic governance which is in line with global best practices. The implication of this position is that an export driven economy was seen to be generating enormous foreign reserves/exchange resources that is largely motivated by export performance .This was the position of the proponent of export-led growth theory, that the performance of an economy can be enhanced through export, thereby generating the needed foreign exchange to help in the importation of capital inputs for further production.
The estimated coefficient of oil revenue as it relates to the fluctuating level of foreign exchange reserve was put at 42% which is highly impressive. The performance of the variable was not only positive, but statistically significant as well. The result
substantiates and was consistent in explaining the level of foreign exchange reserve with the other analyses (descriptive, causality and now the two stage analysis).Most importantly; the relative impact of the variable on the dependent variable was the highest (46%) in the model (2SLS result). Since the coefficient value is 0.420141, it means that 42% of the variation in the level of foreign exchange reserve was positively influenced by the variation in oil revenue for the period of study. Technically, it means that 1%
increase in oil revenue led to 42% increase in the level of foreign exchange reserve. The result is consistent with apriori expectation; since oil revenue is Nigeria‘s source of foreign exchange earnings and foreign exchange reserve.
The sign of the coefficient of Debt Servicing (DBTSERV) is positive and not statistically significant. The coefficient value is 0.049157, implying that 1% increase in debt servicing is accompanied by an increase in the level of foreign exchange reserve.
Though this finding negates the study‘s apriori- expectation, the outcome was however not unexpected because of the debt relief granted in 2005 that lessens the burden of debt servicing and therefore increased the foreign capital inflows and, hence, the positive position of foreign reserve.
The explanatory power of the regression line (the coefficient of multiple determination), denoted by R2 and adjusted-R2 are 0.791661 and 0.741660 respectively, which is very high, about 74%. This high value implies a strong goodness of fit and therefore it can be said that the model has captured the critical variables relevant in explaining the variation in the dependent variable.