Exchange Rate and Price Volatility in Nigeria: Implications on Macroeconomic Stability

This research centered on exchange rate and price volatility in Nigeria. Exchange rate and price volatility are becoming serious concern in the Nigerian economy because of their rapid changes and high volatile trend leading to macroeconomic instability. We aimed to empirically investigate volatility of exchange rate and general price level in Nigeria and their effects on macroeconomic stability. The ARCH and GARCH models are employed to check for volatility clustering. The impulse response and forecast error decomposition were derived from VAR to measure interrelationships among the macroeconomic variables which include, parallel market exchange rate (BEXR), consumer price index (CPI) and changes in the gross domestic product (GDP). Results showed presence of volatility clustering in the exchange rate and general price level in Nigeria. The implications are low saving and low investment and diminishing real income leading to vicious circle of poverty. Findings also revealed no significant output responses to both parallel market exchange rate and the general price level. As a result, the two variables might be inefficient policy instruments to stimulate output growth. However, for the import dependent Nigerian economy, the two variables cannot be totally isolated in policy making. Therefore, they surely must be stabilized to achieve stable macroeconomic environment. This requires that the distribution line of foreign exchange from official to parallel market must be thoroughly checked. Import substitution industrialization hinge on commercial production of goods and services within the domestic economy reduces pressure on foreign goods demand, exchange rate demand and consequently enhances stabilization of the entire macroeconomic framework.