EXCHANGE RATE DYNAMICS AND ECONOMIC PERFORMANCE: EVIDENCE FROM NIGERIA

 

Lawrence Uchenna OKOYE¹*, Uchechukwu E, OKORIE², Johnson I. OKOH³, Felicia O. OLOKOYO⁴, Felix N. EZEJI⁵

¹Dr., Covenant University Ota, Nigeria, lawrence.okoye@covenantuniversty.edu.ng

²Mr., Covenant University Ota, Nigeria, uchechukwu.okorie@covenantuniversty.edu.ng

³Dr., National Open University of Nigeria, okohjohnson1@gmail.com

⁴Dr. Covenant University Ota, Nigeria, felicia.olokoyo@covenantuniversity.edu.ng

⁵Mr., Ebonyi State University, Abakaliki, Nigeria, felixezeji67@gmail.com

*Corresponding Author

 

Abstract

The paper examined the nexus between exchange rate policy and economic performance in Nigeria to determine growth-supportive policy option for a developing economy. Exchange rate effect on growth was analyzed under two distinct phases of exchange rate management: fixed (1970-1986) and floating (1987-2016) regimes. The full impact assessment of exchange rate on economic growth was also examined for the entire period (1970-2016). Using the generalized autoregressive conditional heteroskedasticity (GARCH) model, the mean equation shows significant positive effect of exchange rate on growth over the full sample period and under the floating regime. Exchange rate effect on growth during the fixed regime was negative and non-significant. In terms of volatility, the study did not show significant evidence of exchange rate volatility over the full sample period and under the fixed regime. However, under the floating regime, there is evidence of strong negative volatility effect of exchange rate on economic growth. Based on the above findings, the study concludes that exchange rate policy is a major determinant of economic performance in Nigeria. The study therefore recommends that for developing economies that rely on manufactured and industrial goods imports, exchange rate management should follow a gradual transition process from the fixed to the floating exchange rate policy so as to smoothen the transition-induced shocks. In other words, as these nations develop and maintain a robust domestic production capacity, they should gradually liberalize their economic policies, including exchange rate in order to optimize the benefits of stable exchange rate.

Keywords: Exchange rate policy; Economic performance; Exchange rate volatility