Institutional Quality and Exchange Rate Volatility in Nigeria: A Nonlinear Autoregressive Distributed Lag Approach

Abstract

This study examines the impact of institutional quality on exchange rate volatility in Nigeria. The period of investigation spans 1981 – 2020, using annual data from World Bank, Central Bank of Nigeria, international country risk guide and National Bureau of Statistics. The technique of analyses is based on the Nonlinear Autoregressive Distributed Lag model this was purposely to examine the asymmetric impacts of the measure of institutional quality on exchange rate volatility in Nigeria. The institutional quality variables used are contact intensive money, revenue source volatility, political risk factor and policy unpredictability proxied as changes in exchange rate policy while trade openness and financial sector development were used as control variables. The Nonlinear Autoregressive Distributed Lag model was carried out after ensuring the stationarity properties of all variables and establishing the existence of long run relationship among the variables. Specifically, political risk factor and revenue source volatility all have negatively significant impacts on exchange rate volatility in Nigeria. Also the level of financial sector development and trade openness has negative impact of exchange rate volatility for the period under study. The findings are suggestive of restructuring of the political space and economic diversification as the major antidotes to reducing the volatility of exchange rate in Nigeria. Also, there should be diversification away from monolithic economy such that attendant global dynamics in oil prices and demand would have less effect on exchange rate volatility in the country. Doing this will substantially reduce revenue source volatility of the Nigerian economy.