Urban Food Price Volatility and Exchange Rate Volatility Nexus in Nigeria

Abstract

The Central Bank of Nigeria has expressed concerns about the foreign exchange spending on imported food items that could be manufactured locally. Therefore, the CBN has excluded a number of items from the Nigerian foreign exchange market, and introduced a number of interventions focusing on agricultural sector. These include the Anchor Borrowers Programme (ABP), which aims at reducing food import as a means of foreign exchange conservation. This study investigates urban food price volatility spillover to exchange rate volatility in Nigeria. This objective was achieved through a two-step methodological procedure. In the first step, a Multivariate Generalize Autoregressive Heteroscedasticity (MGARCH) was estimated to analyse the volatility spillover between the markets and, in the second step, a Vector Autoregressive (VAR) models was estimated using the volatilities measures estimated in the first step. The data used was monthly, from November 2015 to January 2019. The MGARCH result reveals a strong volatility spillover from urban food price to the Nigeria foreign exchange market, reflecting high interconnectivity between these markets. The estimates obtained from the VAR model also confirmed that exchange rate volatility responds positively to shocks in both urban food price and money supply volatilities. Overall, this paper concludes that the results present evidence of volatility spillovers from urban food price and money growth volatilities to exchange rate volatility. Therefore, a key policy implication of this finding is to maintaining monetary growth stability by the monetary authorities, achieving commodity market stability, especially food could be an effective means of achieving exchange rate stability.