Macroeconomic Policy “Shocks” And Exchange Rate Volatility In Nigeria (1986 – 2009)

ABSTRACT

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.