Monetary Policy on Exchange Rate Volatility in Nigeria: Evidence from BARDL/ARCH and Garch Modellings

Abstract

While the impact of monetary policy on the exchange rate has been explored in the literature, the volatility of the exchange rate remains an important issue of concern. This study examines the impact of monetary policy on exchange rate volatility in Nigeria. The study uses annual time series data covering 1987 until 2023 which was analysed using Autoregressive Conditional Heteroscedasticity (ARCH), bootstrap bound test for cointegration and Granger causality test within the vector error correction model. The empirical finding of the ARCH reveals the presence of conditional volatility of the exchange rate. Moreover, findings from the bootstrap bound test establish a long-run relation among the variables. The study further found that the volatility of the exchange rate is accounted for by the changes in money supply and previous fluctuation of the exchange rate. The causality test indicates the existence of causality from exchange rate volatility to money supply, interest rate, saving and population in both in short and long run. The study concludes that the volatility of the exchange rate is driven by the variability of money supply, interest rate and savings. Therefore, controlling the shocks emanating from previous exchange rate volatility and money supply is key to addressing the exchange rate fluctuation in Nigeria. The study recommends a policy mix of utilizing key fiscal and monetary policy tools that could enable Nigeria to achieve exchange rate stability.