Exchange Rate Volatility and Economic Growth in Nigeria
Abstract
The study investigated the impact of exchange rate volatility on economic growth in Nigeria, utilizing annual time-series data spanning 27 observations. The research employed a comprehensive econometric framework, including the Augmented Dickey-Fuller (ADF) unit root test, Johansen Cointegration, and the Autoregressive Distributed Lag (ARDL) Error Correction Model (ECM). Preliminary diagnostics via Descriptive Statistics and Jarque-Bera tests confirmed the normality of the primary variables, while Variance Inflation Factor (VIF) analysis identified moderate to acceptable multicollinearity among exchange rate and growth indicators. The unit root results revealed that all variables are integrated of order one I(1), and the Johansen test confirmed the existence of a long-run equilibrium relationship. The empirical results from the ARDL-ECM revealed that exchange rate volatility (ERVOL) has a statistically significant negative impact on economic growth in the short run (b = -155.69, p < 0.05). Conversely, interest rates and trade openness demonstrated statistically insignificant effects within the study period. A key finding is the highly significant Error Correction Term (ECT) of -1.046, indicating an exceptionally rapid speed of adjustment where the economy corrects deviations from the long-run equilibrium almost entirely within one period. The study concluded that currency instability is a primary deterrent to steady GDP expansion in Nigeria. It recommended that the Central Bank of Nigeria (CBN) prioritize exchange rate stabilization and that fiscal authorities pursue aggressive export diversification to insulate the economy from external shocks.