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