Macroeconomic Policy Shocks and Exchange Rate Volatility in Nigeria (1986-2009)
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This study examined the extent to which macroeconomic policy shocks had contributed to exchange rate volatility in Nigeria from 1986 to 2009. Specifically, it established the degree and severity of exchange rate volatility in Nigeria and then examined the impact of macroeconomic policy shocks on real exchange rate volatility in Nigeria during the sample period. Furthermore, the study determined the differential effects of both internal and external macroeconomic policy shocks on the exchange rate volatility in Nigeria and also analysed the implications of exchange rate policy regime shift on exchange rate volatility in Nigeria with a view to ascertaining the ascertain the causal relationship between the macroeconomic policy shocks and exchange rate volatility in Nigeria. The study used secondary quarterly time series data for Nigeria for the period 1986 to 2009. A modified version of Mundel- Fleming open macroeconomic theoretical model which incorporated the Purchasing Power Parity (PPP) assumption of exchange rate determination was developed. This theoretical framework was adjusted to take cognisance of the peculiarity and structural characteristics of Nigerian economy as a small open import dependent economy. The model was dichotomised into internal and external policy shocks and several policy shock scenarios were specified to detect the possible differential effects of the internal and external policy shocks on exchange rate volatility in Nigeria. The study used Generalised Autoregressive Conditional Heteroskedasticity (GARCH) approach to determine the degree and severity of exchange rate volatility in Nigeria while the VAR and VEC models were applied to estimate the effects of macroeconomic policy shocks on exchange rate volatility in Nigeria and to establish the direction of causal nexus between the macroeconomic policy variables and exchange rate validity indices. The results from the study showed that high degree exchange rate volatility existed during the sample period and it was found to be severe and persisted over sample period. The result also showed that foreign price, foreign interest rate, oil price, domestic price, foreign exchange demand-supply gap, fiscal imbalance and domestic monetary policy variables were the only macroeconomic policy variables that had significant influence on exchange rate volatility in Nigeria. The study established that there was a marked difference in the effects of internal and external macroeconomic policy shocks on exchange rate volatility. Each of the external macroeconomic policy shock variables like foreign prices, interest rate, net foreign asset and oil price shocks, explained not less than 51% of variation in exchange rate volatility, none of domestic policy shock variables explained up to 30% of the changes in exchange rate volatility in Nigeria for the sample period. In addition, the result showed that the degree and severity of exchange rate volatility also differed across exchange rate policy regimes. For instance, it was found that exchange rate volatility during the SAP era was mainly accounted for by external macroeconomic policy shocks while exchange rate volatility during Post –SAP period was accounted for by internal macroeconomic policy shocks, most especially the monetary policy shocks. The volatility of exchange rate during the NEEDS period was accounted for by both internal and external macroeconomic policy shocks. The study concluded that though exchange rate volatility was caused by both internally and externally induced policy shocks, a significant proportion of the volatility was due to externally induced policy shocks which are outside the direct control of macroeconomic policy management in Nigeria. The policy implication of the results from this study is therefore that exchange rate stability could only be achieved through a well coordinated fiscal and monetary policy mix that can respond swiftly and quickly to external shocks. Key Words:
A Thesis Submitted to the School of Postgraduate Studies, University of Lagos
Exchange rate , Volatility , Shocks , ,Macroeconomic Policy , SVAR Model , Research Subject Categories::SOCIAL SCIENCES::Business and economics::Economics
Adeoye, B.W (2012). Macroeconomic Policy Shocks and Exchange Rate Volatility in Nigeria (1986-2009). A Thesis Submitted to University of Lagos School of Postgraduate Studies Phd Thesis and Dissertation, 230pp.