The Macroeconomic Determinants of Exchange Rate Volatility and the Impact of Currency Volatility on the Performance of the Nigerian Economy

Abstract

This article explored the determinants of exchange rate volatility in Nigeria and the effects of exchange rate volatility in influencing macroeconomic performance in Nigeria using quarterly data from Q1 1986 to Q4 2023. This article achieved its objectives using a battery of statistical and econometric techniques including autoregressive conditional heteroscedasticity (ARCH), non-linear generalised ARCH and the novel dynamic autoregressive distributed lag (ARDL) techniques. The findings revealed that ARCH and nonlinear generalised autoregressive conditional heteroscedasticity effects influenced exchange rate volatility. Furthermore, the findings showed that the monetary policy rate, average lending rate, oil prices, government expenditure and financial development are all significant determinants of exchange rate volatility in Nigeria. In addition, the findings revealed that exchange rate volatility had significant effects on Nigeria’s macroeconomy. Finally, this article recommended that the monetary authorities institute policies that will ensure a limit within which the exchange rate can fluctuate to better predict economic outcomes and control the general price level in Nigeria. Therefore, the priority lies in ensuring that exchange rates are stable and predictable due to the import-dependence nature of its economy.

JEL Codes: E31, E58, F31, F32, F33, F43, F62

Keywords

Exchange rate volatility ARCH non-linear GARCH novel dynamic ARDL Nigeria

Get full access to this article

View all access options for this article.

References

Abdalla

S. Z. S.

(2012). Modelling exchange rate volatility using GARCH models: Empirical evidence from Arab Countries. International Journal of Economics and Finance, 4(3), 216–229.

Adeniyi

, Oyinlola

, Omisakin

, & Egwaikhide

F. O.

(2015) Financial development and economic growth in Nigeria: Evidence from threshold modelling. Journal of Economic Analysis & Policy, 47, 11–21.

Adeoye

B. W.

, & Atanda

A. A.

(2011). Exchange rate volatility in Nigeria: Consistency, persistency & severity analyses. CBN Journal of Applied Statistics, 2(2), 29–49.

Ajao

M. G.

, & Igbekoyi

O. E.

(2013). The determinants of real exchange rate volatility in Nigeria. Academic Journal of Interdisciplinary Studies, 2(1), 459–471.

Akpan

O. E.

, & Atan

J. A.

(2012). Effect of exchange rate movement and economic growth in Nigeria. CBN Journal of Applied Statistics, 2(2), 1–14.

Alagidede

, & Ibrahim

(2017). On the causes and effects of exchange rate volatility on economic growth: Evidence from Ghana. Journal of African Business, 18(2), 169–193.

Aubion

, & Ruta

(2011). The relationship between exchange rates and international trade: A review of economic literature [WTO Staff Working Paper, World Trade Organisation], pp. 1–28.

Bahmani

, & Bahmani-Oskooee

(2012). Exchange rate volatility and demand for money in Iran. International Journal of Monetary Economics and Finance, 5(3), 268–276.

Bahmani-Oskooee

, & Aftab

(2017). On the asymmetric effects of exchange rate volatility on trade flows: New evidence from US–Malaysia trade at the industry level. Economic Modelling, 63, 86–103.

10.

Bello

K. M.

, Olayungbo

D. O.

, & Folorunso

B. A.

(2022). Exchange rate volatility and macroeconomic performance in Nigeria. Macroeconomic analysis for economic growth. IntechOpen. https://doi.org/10.5772/intechopen.100444

11.

Benazic

, & Kersan-Skabic

(2016). The determinants of the exchange rate in Croatia. Eastern Journal of European Studies, 7(1), 125–150.

12.

Benita

, & Lauterbach

(2007). Policy factors and exchange rate volatility: Panel data versus a specific country analysis. International Research Journal of Finance and Economics, 7(7), 7–23.

13.

Bollerslev

(1986). Generalized autoregressive conditional heteroscedasticity. Journal of Econometrics, 31, 307–327.

14.

Central Bank of Nigeria (CBN). (2017a). Establishment of investors and exporters window. https://www.cbn.gov.ng/out/2017/fmd/establishment%20of%20investors%27%20&%20exporters%27%20fx%20window.pdf

15.

Central Bank of Nigeria (CBN). (2017b). Exchange rate policy and macroeconomic management. https//www.cbn.gov.ng/intops/exchratepolicy

16.

Central Bank of Nigeria (CBN). (2023). Weighted average rate. Nigerian Foreign Exchange Market (NFEM). https://www.cbn.gov.ng/rates/ExchRateByCurrency.asp

17.

Central Bank of Nigeria (CBN) Bulletin. (2024). CBN statistical bulletin, 2023 ed. https://www.cbn.gov.ng/documents/statbulletin.asp

18.

Chipili

J. M.

(2014). Central bank intervention and exchange rate volatility in Zambia [Working Research Paper 268, African Economic Research Consortium].

19.

Christiano

L. J.

, Eichenbaum

, & Evans

(1999). Monetary policy shocks: What have we learned and to What End? In Woodword

& Taylor

(Eds.), Handbook of macroeconomics. Northwestern University.

20.

David

R. O.

, Dikko

H. G.

, & Gulumbe

S. U.

(2016). Modelling volatility of the exchange rate of the Naira to major currencies. CBN Journal of Applied Statistics, 7(2), 159–187.

21.

Dickey

D. A.

, & Fuller

W. A.

(1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74, 427–431.

22.

Dinoshi

, & Fortuzi

(2016). Real exchange rate volatility and international trade: The case of Albania. In Proceedings of the 13th international conference of ASECU, social and economic challenges in Europe 2016–2020.

23.

EIA (2024). Petroleum & other liquids, energy information administration (EIA). https://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm (accessed 24 August 2024 ).

24.

Engle

(1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50, 987–1007.

25.

Gadanecz

, & Mehrotra

(2013). The exchange rate, real economy and financial markets. In Bank for International Settlements (Ed.), Sovereign risk: A world without risk-free assets? (Vol. 3, pp. 11)–23). Bank for International Settlements.

26.

Globerman

, & Storer

(2005). Exchange rate volatility, pass-through, trade patterns, and inflation targets. Journal of Economics, 7(2), 125–149.

27.

Grydaki

, & Fountas

(2009). Exchange rate volatility and output volatility: A theoretical approach. Review of International Economics, 17(3), 552–569.

28.

Grydaki

, & Fountas

(2010). What explains nominal exchange rate volatility? Evidence from the Latin American countries. [Discussion Paper Series No. 10, Department of Economics, University of Macedonia].

29.

Hakkio

C. S.

(1982). Exchange rate determination and the demand for money. Review of Economics and Statistics, 64, 681–686.

30.

Hassan

, Abubakar

, & Dantama

Y. U.

(2017). Determinants of exchange rate volatility: New estimates from Nigeria. Eastern Journal of Economics and Finance, 3(1), 1–12.

31.

Hau

(2002). Real exchange rate volatility and economic openness: Theory and evidence. Journal of Money Credit and Banking, 34(3), 611–630.

32.

Hondroyiannis

, Swamy

P. A. V. B.

, Tavlas

G. S.

, & Ulan

(2008). Some further evidence on exchange-rate volatility and exports. Review of World Economics/Weltwirtschaftliches Archiv, 144(1), 151–180.

33.

Hsing

(2006). Determinants of exchange rate fluctuations for Venezuela: Application of an extended Mundell–Fleming model. Applied Econometrics and International Development, 6(1), 139–146.

34.

Huh

H. S.

(1999). How well does the Mundell–Fleming Model fit Australian data since the collapse of Bretton Woods? Applied Economics, 31(3), 397–407.

35.

Insah

, & Chiaraah

(2013). Sources of real exchange rate volatility in the Ghanaian economy. Journal of Economics and International Finance, 5(6), 232–238.

36.

Jamal

, & Bhat

G. M.

(2022). Disentangling the nexus between exchange rate volatility, exports, and FDI: Empirical evidence from the Indian economy. Global Journal of Emerging Market Economies, 15(3), 449–472. https://doi.org/10.1177/09749101221108788

37.

Jayasekara

S. G. S. D.

(2013). Exchange rate, exchange rate volatility and foreign direct investment in Sri Lanka. Sri Lanka Journal of Advanced Social Studies, 3(2), 75–96.

38.

Jordan

, & Philips

A. Q.

(2018). Cointegration testing and dynamic simulations of autoregressive distributed lag models. Stata Journal, 18, 902–923.

39.

Judge

, Griffith

W. E.

, Hill

R. C.

, Lutkepohl

, & Lee

T. C.

(1985). The theory and practice of econometrics (2nd ed.). John Wiley & Sons.

40.

Krugman

P. R.

, & Obstfeld

(2006). International economics: Theory and policy (7th ed.), Addison-Wesley.

41.

Mahmood

, Ehsanullah

, & Ahmed

(2011). Exchange rate volatility & macroeconomic variables’ in Pakistan. Business Management Dynamics, 1(2), 11–22.

42.

Mirchandani

(2013). Analysis of macroeconomic determinants of exchange rate volatility in India. International Journal of Economics and Financial Issues, 3(1), 172–179.

43.

Morales-Zumaquero

, & Sosvilla-Rivero

(2013). Real exchange rate volatility, financial crises and nominal exchange regimes [Instituto Complutense de Estudios Internacionales (ICEI) Working Papers No. 06].

44.

Mordi

G. N. O.

(2014). Exchange rate and inflation: Is there a relationship in Nigeria. Economics and Financial Review, 52(4), 105–123.

45.

Mundell

R. A.

(1968). International economics. MacMillan.

46.

Mundell

R. A.

(2001). On the history of the Mundell–Fleming model: Keynote speech [IMF Staff Papers, 47(0), Special Issue], pp. 215–227.

47.

Nelson

D. B.

(1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica, 59(2), 347–370.

48.

Oaikhenan

H. E.

, & Aigheyisi

O. S.

(2015). Factors explaining exchange rate volatility in Nigeria: Theory and empirical evidence. Central Bank of Nigeria Economic and Financial Review, 53(2), 47–77.

49.

Ojo

A. T.

, & Alege

P. O.

(2014). Exchange rate fluctuations and macroeconomic performance in sub-Saharan Africa: A dynamic panel cointegration analysis. Asian Economic and Financial Review, 4(11), 1573–1591.

50.

Okolo

C. V.

, Ugwuanyi

O. S.

, & Okpala

K. A.

(2016). Exchange rate volatility, its determinants and effects on the manufacturing sector in Nigeria. International Journal of Economics and Management Engineering, 10(12), 4001–4009.

51.

Olayungbo

D. O.

(2021). Volatility effects of the global oil price on stock price in Nigeria: Evidence from linear and non-linear GARCH. In Terzioğlu

M. K.

& Djurovic

(Eds.), Linear and non-linear financial econometrics. IntechOpen. https://doi.org/10.5772/intechopen.93497

52.

Oyadeyi

(2022). A systematic and non-systematic approach to monetary policy shocks and monetary transmission process in Nigeria. Journal of Economics and International Finance, 14(2), 23–31. https://doi.org/10.5897/JEIF2022.1170

53.

Oyadeyi

(2023a). Financial inclusion, e-payments and economic growth in Nigeria. International Journal of Financial Innovation in Banking. https://doi.org/10.1504/IJFIB.2023.10056524

54.

Oyadeyi

(2023b). Financial development, real sector, and economic growth in Nigeria. SN Business & Economics, 3, 146. https://doi.org/10.1007/s43546-023-00526-0

55.

Oyadeyi

(2023c). Banking innovation, financial inclusion and economic growth in Nigeria. Journal of the Knowledge Economy, 15, 7014–7043. https://doi.org/10.1007/s13132-023-01396-5

56.

Oyadeyi

(2023d). Financial development, interest rate pass-through and interest rate channel of monetary policy. Cogent Economics & Finance, 11(1), 2209952. https://doi.org/10.1080/23322039.2023.2209952

57.

Oyadeyi

(2024a). Monetary integration across West Africa: Is the region ripe for a monetary union? SageOpen, 14(2), 1–21. https://doi.org/10.1177/21582440241242958

58.

Oyadeyi

(2024b). Testing the J-curve, Marshall–Lerner condition and Thirlwall hypothesis—An empirical evidence from Nigeria. International Journal of Business and Emerging Markets, 16(3), 313–334. https://doi.org/10.1504/IJBEM.2024.10062439

59.

Oyadeyi

, & Akinbobola

(2022b). Further insights on monetary transmission mechanism in Nigeria. Journal of Economics and International Finance, 14(2), 11–22.

60.

Oyadeyi

, & Akinbobola

(2022a). Financial development and the current account in Nigeria. IOSR Journal of Economics and Finance, 13(2), 65–74.

61.

Oyadeyi

O. O.

, & Akinbobola

(2020). Financial development and monetary transmission mechanism in Nigeria (1986–2017). Asian Journal of Economics and Empirical Research, 7(1), 74–90. https://doi.org/10.20448/journal.501.2020.71.74.90

62.

Oyadeyi

O. O.

, Agboola

O. W.

, Okunade

S. O.

, & Osinubi

T. T.

(2024). The debt-growth nexus and debt sustainability in Nigeria: Are there reasons to be concerned? Journal of Policy Modelling, 46(1), 129–152. https://doi.org/10.1016/j.jpolmod.2023.11.004

63.

Oyinlola, Mutiu

(2018). Modelling volatility persistence and asymmetry of Naira-dollar exchange rate. CBN Journal of Applied Statistics, 9(1), 141–165.

64.

Pesaran

M. H.

, & Shin

(1999). An autoregressive distributed lag modelling approach to cointegration analysis. In Strom

(Ed.), Econometrics and economic theory in the 20th century: The Ragnar Frisch centennial symposium. Cambridge University Press.

65.

Phillips

P. C. B.

, & Perron

(1988). Testing for a unit root in time series regression. Biometrika, 75, 335–346.

66.

Šimáková

(2016). The gravity modelling of the relationship between exchange rate volatility and foreign trade in Visegrad countries. ACTA VŠFS, 10(1), 7–30.

67.

Sims

C. A.

(1992). Interpreting the macroeconomic time series facts: The effects of monetary policy. European Economic Review, 36, 975–1000.

68.

Stancik

(2007). Determinants of exchange-rate volatility: The case of the new EU members. Czech Journal of Economics and Finance, 57(9–10), 414–432.

69.

Supaat

, Juin

A. P. S.

, Tiong

N. H.

, & Robinson

(2003). Investigating the relationship between exchange rate volatility and macroeconomic volatility in Singapore [Staff Paper No. 25, Monetary Authority of Singapore (MAS)].

70.

Taylor

B. J. B.

(2001). The role of the exchange rate in monetary-policy rules. American Economic Review, 91(2), 263–267.

71.

Tenreyro

(2007). On the trade impact of nominal exchange rate volatility. Journal of Development Economics, 82, 485–508.

72.

Todani

K. R.

, & Munyama

T. V.

(2005). Exchange rate volatility and exports in South Africa [Working Paper, Research Department, South African Reserve Bank].

73.

Twarowska

, & Kąkol

(2014). Analysis of factors affecting fluctuations in the exchange rate of Polish Zloty against Euro. Human capital without borders: Knowledge and learning for quality of life. In Proceedings of the management, knowledge and learning international conference 2014.

74.

Udoh

, & Ogbuagu

U. R.

(2012) Financial sector development and industrial production in Nigeria (1970–2009): An ARDL cointegration approach. Journal of Applied Finance & Banking, 2(4), 49–68.

75.

Udousung

I. J.

, John

D. E.

, & Umoh

(2012). Real Exchange rate determinants in Nigeria (1971–2000). Global Journal of Management and Business Research, 12(20), 20–26.

76.

Umoru

, Effiong

S. E.

, Ugbaka

M. A.

, Akhor

S. O.

, Iyaji

, Ofie

F. E.

, Ihuoma

C. C.

, Okla

E. S.

, & Obomeghie

M. A.

(2023). Modelling and estimating volatilities in exchange rate return and the response of exchange rates to oil shocks. Journal of Governance & Regulation, 12(1), 185–196. https://doi.org/10.22495/jgrv12i1art17

77.

Urata

, & Kiyota

(2003). Exchange rate, exchange rate volatility, and foreign direct investment. The World Economy, 27(10), 1501–1536.

78.

Williamson

(1994). Estimates of FEERs in estimating equilibrium exchange rate. Institute of International Economics.

79.

Yuan

(2011). The exchange rate and macroeconomic determinants: Time-varying transitional dynamics. The North American Journal of Economics and Finance, 22(2), 197–220.