Exchange Rate Volatility and Economic Growth in Nigeria

An Investigation of Monetary Policy Effects

Abstract

Given the persistent fluctuations in the naira and their implications for investment, trade, inflation, and overall economic performance, it is imperative for monetary authorities to adopt policies that enhance exchange rate stability and support sustainable growth. It is against this backdrop that this study seeks to investigate the impact of exchange rate volatility and economic growth in Nigeria: an investigation of monetary policy effects, using secondary annual time series data from 1981 to 2024 from the Central Bank of Nigeria Statistical Bulletin and data from World Development Indicators (WDI). The dependent variable is real gross domestic product (RGDP), while real effective exchange rate (REER), broad money supply (M2), credit to private sector (CTS), interest rate (INT), inflation rate (INFL), foreign direct investment (FDI), and trade openness (TOP) were the independent and control variables, respectively. The test mechanisms adopted were the unit root test for co-integration and the Autoregressive Distributed Lag (ARDL) technique. Findings revealed that there is a positive and significant relationship existing between the real effective exchange rate, interest rate, credit to the private sector, and foreign direct investment in both the long and short run periods, suggesting that these variables contribute immensely to economic growth and monetary policy effectiveness in Nigeria when properly harnessed. However, broad money supply, inflation rate, and trade openness exhibited a shocking negative and insignificant relationship with economic growth in both periods, showing that during the period under review, the underlisted variables were not properly or adequately harnessed to bring about monetary policy effectiveness, thereby improving growth in Nigeria. Therefore, for policy, the study recommended that Government should strengthen the monetary policy transmission mechanism by improving credit flow to the productive sectors and enhancing financial market efficiency ,adopt a more credible and transparent inflation-targeting framework, support by stronger coordination with fiscal authorities to minimize deficit financing pressures, ensure that Exchange rate stability is essential to ensure that trade openness promotes competitiveness and supports domestic production and finally, structural reforms such as improving infrastructure, diversifying exports, and addressing supply-side constraints should complement monetary policy to ensure that changes in money supply, price levels, and trade conditions translate effectively into sustainable economic growth.