Effect of external debt on real exchange rate volatility in Nigeria
BRIEF OVERVIEW
Exchange rate is defined as the price of one unit of currency in terms of another currency. In other words, exchange rate can be calculated in terms of nominal or real exchange rate. According to Miles and Scott,(1997) nominal exchange rate is the rate at which the currencies of two countries can be exchanged, whereas the real exchange rate is the ratio of what a specified amount of money will buy in one country compared with what it can buy in another. They first consider the law of one price, which says that, in the absence of trade restrictions and transportation costs, the same commodity should have the same price wherever it is sold. They first use the law of one price to derive Purchasing Power Parity (PPP), which says that identical bundles of goods should cost the same in different countries. This implies that the real exchange rate should be constant and equal to one and that changes in the nominal exchange rate are driven by inflation differences.
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