The
study discovered that a higher domestic interest rate will cause real
depreciation of the IDR/U.S dollars exchange rate whereas a higher stock price
will lead to real appreciation and this is consistent with the postulation of
the Mundell –Fleming model. However the study by
Siklos (1988), in Canada did not empirically validate the Mundell Fleming
model. The study was carried out using a VAR model and the results showed that
there is no empirical link between output deficits and interest rates.

Further
studies show that devaluation as a policy instrument in the Mundell-Fleming
model increases net exports. This is a postulation supported by the
Marshal-Lerner theory. Further on the effect of exchange rate on the flow of
net exports. Udomkerdmonkol et al (2006),)
investigated the impact of exchange rates on the U.S FDI inflows to a sample of
sixteen emerging market countries using panel data for period 1990-2002. The
results show that there is a negative relationship between the expectation of
local currency depreciation and FDI inflows. In other words, cheaper local
currency (devaluation) attracts FDI while volatile exchange rates discourage
FDI.

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Ullah
et al (2012) studied the relationship among FDI, exchange rate and exchange
rate volatility. In this study, time series data was used for foreign direct
investment, exchange rate, exchange rate volatility, trade openness and
inflation, from 1981 to 2010 for Pakistan. The results squeezed from the study
demonstrate that FDI is positively associated with Rupee depreciation and
exchange rate volatility deters FDI. Pandey(2013) did a work on trade
elasticities and the Marshal -Lerner condition for China. Using a multivariate
co integration approach, the research found that a rise in real exchange rate
boosts India?s exports as expected in theory, meaning that the Marshall- Lerner
condition holds in India. Chingarade et al (2012) tried to find the
relationship and impact of interest rates on FDI flows. They also sought to
find out other determinants that significantly affect FDI inflows in Zimbabwe
in the period February 2009-june 2011. The research hypothesis tested that high
interest rates have a positive impact on FDI inflows. The technique of ordinary
least squares (OLS) was used. This paper found that interest rate had no
significant impact on FDI and hence cannot be used in making policies.

On
some literature reviewed on Nigeria, Olasunkunmi and Babatunde(2013) conducted
a research on empirical analysis of fiscal policy shocks and current account
dynamics in Nigeria over the period 1980:1-2010:4. The study employed a
VAR model and the results showed that an expansionary fiscal
policy shocks has a positive effect on output, exchange rate and negative
impacts on current account balance and interest rate and this is in line with
the postulations of the Mundell-Fleming model. Babatunde and Akinwade (2010)
examines the consistency, persistency and severity of volatility in exchange
rate of the Nigeria currency vis-a-vis United States dollar using monthly time
series data from 1986- 2008. The ARCH and GARCH methodology was employed. The
results indicated the presence of overshooting volatility shocks. Ibrahim
(2013) investigated the effects of real exchange rate misalignment on capital
inflow in Nigeria between the year 1960 and 2011. The paper computes real
effective exchange rate using IT trade partners of Nigeria. The two stage error
correction method developed by Engel and Granger (1989).

Frederick, Amuka,
Hadassah and Attamah (2014) Considered
the constant outflow of capital and the constant trade deficit in the Nigerian
economy, the Mundell-Fleming model provided policy prescriptions for such
unfavourable situation. However, the empirical validity of this model was
tested in their work which showed the model applicability in Nigeria context.
The study was carried out using data obtained from the Central Bank of Nigeria
(CBN) 1981 to 2012 The technique of Vector Autoregressive Model and the Granger
causality test were used to test the empirical validity of this model in
Nigeria. The result of the impulse – response function using VAR showed that
the prediction of the Mundell-Fleming theory held and its policy prescriptions
can be effective in the Nigerian economy. Based on the position of the reversed
of the model adopted for this study, most of the studies reviewed for this
research focused on how monetary policy impact the external sector but in this
study, the focus will be on how monetary policy respond to shocks and maintain stability
when been confronted with the vagaries of the external sector which has not
been considered by any of the researches available at the period of study. The
scope is also a great advantage because it captures the shocks experienced in
2016 owing to the fact that the data on the fiscal year has just been made
available by NBS while  

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