Countries are showing interest in accumulating foreign
reserves to ensure macroeconomic stability. There has been some debate
whether to beef up the level of nations’ foreign reserves or make it lower,
especially in developing countries like Nigeria. Whereas some argue that
the foreign reserve determines the country’s rating in the global market,
others hold opposing views. In this light, this paper examined the interactive
influence of foreign reserve (FRS) on some macroeconomic variables such
as: economic size (GDP); trade; level of capital inflows (KFL); exchange
rate (EXR); and inflation. Analyzing secondary data from CBN statistical
bulletins (1970–2007), the econometric results obtained from cointegration
test, vector error correction (VEC) within the framework of autoregressive
distributed lags (ARDL) revealed the following: (1) existence of a longrun
relationship between the variables and two cointegrating equations;
(2) possibility of convergence of the variables from the short run to the
long run with slow speed of adjustment. It is thus the conclusion of this
paper that accumulation of large foreign reserves is not very productive
in Nigeria due to its inability to induce some of the macroeconomic
variables
