Exchange Rate Volatility on Economic Growth (1981- 2023)

This study investigates the impact of exchange rate volatility on economic growth in Nigeria over the period 1981 to 2023. Motivated by the persistent fluctuations in Nigeria's exchange rate and growing concerns over their macroeconomic implications, the study sets out to examine the relationship between exchange rate movements and GDP growth. Utilizing time series econometric methods—including unit root testing, Engle-Granger co-integration analysis, Granger causality, and GARCH (1,1) modeling—the study analyzes key macroeconomic indicators such as GDP (log-transformed), exchange rate, inflation (CPI), and lending rate. The empirical findings reveal that while GDP follows a stochastic trend, both inflation and exchange rate exhibit sustained upward trends. All variables were found to be stationary at first difference, and a long-run equilibrium relationship exists between GDP and the explanatory variables. Although no short-term causality was established among the variables, the GARCH model confirms that exchange rate volatility is persistent and significantly hinders economic growth. Additionally, inflation negatively impacts GDP, whereas lending rates show a weak positive effect. These results underscore the adverse effects of exchange rate instability on Nigeria’s economic performance and highlight the importance of policy measures aimed at stabilizing the foreign exchange market to foster sustainable growth.