Exchange Rate Volatility and Economic Growth In Nigeria

Abstract

This study seeks to evaluate the effect of exchange rate volatility on economic growth in Nigeria on the basis of annual data
from 1970 to 2009. A review of the literature reveals that exchange rate volatility can have either positive or negative effect on economic
growth. The empirical analysis began with testing for stationarity of the variables by applying the Augmented Dickey-Fuller (ADF). This
was followed by co-integration test of the model. The unit root test results show that all variables except exchange rate volatility were
integrated at order one, that is I(1) while exchange rate volatility is integrated at order zero that is I(O). Also, co-integration analysis
indicated that variables are co-integrated. Employing the Generalised Autoregressive Conditional Heteroscedasticity (GARCH) technique
to generate exchange rate volatility, the relationship between exchange rate volatility and economic growth was estimated. Findings
further show that in the short run, economic growth is positively responsive to exchange rate volatility while in the long run, a negative
relationship exist between the two variables. The long run result also indicate that increase in oil price depress economic growth in
Nigeria. Thus, the income effect of rising oil price is not felt while the output effect is evidenced in factory closure and re-location to
neighbouring countries. The study recommends control of import content of both public and private expenditure, greater diversification of
the economy through investment in key productive sectors of the economy to guard against the vicissitude exchange rate volatility. Also,
domestic refining of crude oil to avoid the current massive importation and in the short run, we recommend the legalisation of the refining
activities in the creeks to supplement the existing refineries in the country.