EXCHANGE RATE VOLATILITY AND THE GROWTH OF NIGERIA ECONOMY

ABSTRACT

Exchange rate volatility continues to be a significant problem for economic stability, particularly in developing nations. Therefore, the purpose of this study was to investigate, using annual data from 1990 to 2021, the effects of exchange rate volatility on economic growth in Nigeria. Applying the Augmented Dickey-Fuller test to determine whether the variables were stationary was the first step in the empirical investigation (ADF). The co-integration test of the model followed. The results of the unit root test demonstrate that all variables were integrated at order 1, or I(1). Variables are cointegrated, according to co-integration analysis. The relationship between exchange rate volatility and economic growth was assessed using the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) approach. Findings demonstrate that economic growth in Nigeria is negatively responsive to exchange rate volatility over the short term but that were not Significant, whereas over the long term there is a negative and significant relationship between these two variables. The result also showed that balance of trade improves economic growth in Nigeria. However, interest rate, inflation rate, trade openness was found not to be key factors that stimulate economic growth in Nigeria. The bivariate causality test indicates bidirectional causality between exchange rate volatility and economic growth. The study suggests that in order to achieve sustainable economic growth in Nigeria, monetary authorities should pursue policies that would guarantee exchange rate stability. Furthermore, given the significance of foreign investment and trade in the process of economic growth, monetary authorities should make an effort to commit to an exchange rate policy that focuses primarily on stabilizing exchange rates. To promote economic growth, a generally stable and predictable exchange rate appears to be essential.