Spillovers and Connectedness of Economic Policy Uncertainty and Exchange Rate Volatility: Evidence From Advanced Economies and Nigeria .

Abstract

This study examine spillovers and connectedness among economic policy uncertainty of some advanced economies, Nigeria's interest rate, inflation rate and exchange rate volatility using time-varying parameter vector auto regression (TVP-VAR). The study finds that Nigeria's exchange rate volatility is a net receiver of shocks from economic policy uncertainty of advanced economies. Among the economic policy uncertainty, Japan economic policy uncertainty shocks has higher influence on the volatility of exchange rate in Nigeria. There is presence of bidirectional spillover between economic policy uncertainties of US and Europe. There is greater connectedness between economic policy uncertainty of advanced economies and Nigeria's exchange rate volatility as against when there is inclusion of Nigeria's inflation rate and interest rate. The implication from this study is that policy induced uncertainty from the advanced economies is a significant exogenous factor in the fluctuations of Nigeria's exchange rate. Therefore, policy makers needs to understand what policy actions and inactions of advanced economies that is needed to manage exchange rate fluctuations.