Price Instability, Exchange Rate Volatility and the Nigerian Economy: An Empirical Analysis

Abstract

Previous studies on price and exchange rate volatility have commonly focused on its effect on FDI and some sectors of the Nigerian economy, and not much has been conducted on its effect on the economy as a whole. This research therefore empirically verified the dynamics of price and exchange rate volatility on the Nigerian economy for the period of 1970 to 2010. The study was conducted by building a model which looked at the relationship between price, exchange rate and economic growth. Exchange rate variability was estimated using the GARCH model and variables were tested for unit root (stationarity). Consequently, the Johansen cointegration test was also conducted. The analysis was concluded with the estimation of the Error Correction Model (ECM) and interpretation of the short-run and long-run (OLS) results. The study found that the exchange rate in Nigeria is volatile, as the trend shows the fluctuation in price and exchange rate which of course may bear serious implications. Their instability however did not discourage investment and consequently economic growth both in the short and long run. Based on the regression result, it was observed that 1% change in money supply led to about 83.2% change in RGDP, the implication of this is that monetary variable may be a reliable instrument of ensuring growth in the long run. In addition, trade openness significantly depresses growth in the short and long run suggesting the adoption of inward growth strategy.

Keywords: Exchange rate, Growth, Inflation, Macroeconomics, Trade openness.