ABSTRACT

This study presents research findings on the impact of exchange rate volatility on economic growth in Nigeria from (1973-2014). The motivation for the study is hinged on the vicarious exchange rate volatility in Nigeria during the study period as well as the conflicting results posted by empiricists on the subject matter. Accordingly, the study was designed to shed light on how volatility in exchange rate influences growth in real gross domestic product, which was used as proxy for economic growth. Using secondary sources of data gathered from various issues of the CBN statistical bulletin, annual reports and statement of account and deploying an econometric approach, the results challenged some a priori expectations. Deploying state of the art financial econometrics via vector auto-regression (VAR) VECM approach and multiple regression analysis, the study provides robust results that satisfy the objectives of the study. Firstly, unidirectional effect exists between exchange rate volatility and GDP growth rate as rightly captured by the Granger causality test with p-value 0.0614 and 0.1039 respectively. Secondly, exchange rate volatility indicates long-run (significant) impact on growth in GDP as aptly captured by p-value of 0.0077. Lastly exchange rate volatility has no significant impact on growth rate in GDP in the short-run. The study recommends among other things that: Exchange rate management policies should focus on foreign exchange demand strategies with flexibility and incorporate the movement ofinternational oil prices into exchange rate management in order to reduce the negative shocks in the oil prices. Secondly, there should be an improved fiscal restraint and discipline at all levels of government and greater coordination and harmonization of monetary and fiscal policy actions to ensure that injections of liquidity into the system are consistent with macroeconomic objectives. Finally, Money supply should follow adherently the movement in the business cycle (taking note of the zero level, the expansion stage, the peak/boom stage and the recession point) of the economy in order not to inject money into the economy at the wrong stage.