Regime Analysis of Exchange Rate Volatility and Economic Growth in Nigeria
Keywords:
Regime, Exchange Rate Volatility, Exchange Rate, ARCH Effect, GARCH Effect, Economic Growth
Abstract
The study anchored on the traditional theory of exchange rate appraised the asymmetric effects of shocks emanating from exchange rate volatility on certain macroeconomic fundamentals in the Nigerian economy, within two structural regimes of fixed and floating exchange rate, which coincides with military and democratic governance in the country. The study used quarterly data disaggregated into 1986Q1 to 1998Q4 and 1999Q1 to 2010Q4. Using the ARCH model, the study revealed that the selected macroeconomic fundamentals (Exchange Rate, Imports, Exports, External Reserve and Gross Domestic Product) performed better within the period 1999Q1 to 2010Q4. The study also revealed that despite positive trade balances in either period, it was not enough for economic growth to move in the right direction. The study further showed that there exists strong volatility clustering for exchange rate and it is persistent, with the impact ascribed more to past volatility of exchange rate (i.e. ARCH effect) than news or information coming from the previous exchange rate volatility (i.e. GARCH effect). The study recommended that manufacturers should improve on their technological capabilities to boost real production of goods and services; as well as strategies to ease access to credit channels and the control of inflation should be recurring decimals for improvement to enable positive contribution to economic growth.
References
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Akhar, A.M. and Hilton, R.S. (1984). Effects of Exchange Rate Uncertainty on German and US Trade. Federal Bank of New York. Quarterly Review. 9(1).
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Alshogeathri, M.A.M. (2011). Macroeconomic Determinants of Stock Market Movements: Empirical Evidence from the Saudi Stock Market (Unpublished Masters Dissertation), University of Manhattan, Kansas State.
Arize A.C. (1998). Real Exchange Rate Volatility and Trade Flows: The Experience of Eight European Economies. International Revenue and Economic Finance. 5
Ayinde T. O. (2014). The impact of Exchange Rate Volatility on Manufacturing Performance: New Evidence from Nigeria. Fountain Journal of Management and Social Sciences, 3(2).
Bahmani-Oskoee, M. and Kovyryalova, M. (2008). Impact of Exchange Rate Uncertainty on Trade Flows: Evidence from Commodity Trade Between the US and the UK’. The World Economy. 7(2).
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Brada, J.C. and Mendez, J.A. (1988). Exchange rate Risk, Exchange Rate Regimes and the Volume of International Trade’. Kyklus. 41(2)
Caporale, G. M. and Pittis, N. (1995). Nominal Exchange Rate Regimes and the Stochastic Behaivour of Real Variables. Journal of International Money and Finance. 14(3)
Charemza, W. W. and Deadman, D. F. (1999). New Direction in Econometric Practice: General to Specific Modeling. Co-integration and Vector Autoregression. Edward and Igar Publishing Ltd.
Copelman M and Werner A. M (1996). The Monetary Transmission Mechanism in Mexico. Working Paper No 25 Washington D.C. Federal Reserve Board.
De grauwe, P (1988). Exchange Rate Variability and the Showdown in Growth of International Trade’. IMF Staff Papers. 35
Dickey, D. A. and Fuller, W. A. (1979). Distribution of the Estimates for Autoregressive Time-Series with a Unit Root. Journal of the American Statistical Association. 74
Doganlar, M. (2002): ‘Estimating the Impact of Exchange Rate Volatility on Exports: Evidence from Asian Countries. Journal of Applied Economic Letters, 9
Ehinomen C and Oladipo T.I (2012). Exchange Rate Management and the Manufacturing Sector Performance in Nigerian Economy. IORS Journal of Humanities and Social Science 5(5)
Engel R.F. (1982). Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation. Econometrica, 50(4).
Engle, R.F and Granger, C.W.J. (1986). Cointegration and Error Correction Representation, Estimation and Testing. Econometrica, 55
Equivel, G., and Larrain, F. B. (2002). The Impact of G-3 Exchange Rate Volatility on developing Countries. United Nations Conference on Trade and Development. G-24 Discussion Paper Series No 16, Center for International Development Harvard University.
Glauco, D. V. and Abott, A.(2004). The Impact of Exchange Rate Volatility on UK Exports to EU Countries. Scottish Journal of Political Economy, 51
Granger C.W.J. (1969). Investigating Causal Relations by Econometric Models and Cross- Spectral Methods. Econometrica, 37
Gujarati, D.N. (2003). Basic Econometrics, 4th ed. New york- McGraw-Hill
Hacker, R.S. and Hatemi, J.A. (2004). The Effects of Exchange Rates Changes on Trade Balances in the Short and Long run. Economics of Transition. 12(4)
He, C. and Terasvirta, T. (1999). Properties of Autocorrelation Function of Squared Observations for Second Order GARCH Processes Under Two Sets of Parameter Constraints. Journal of Time Series Analysis. 20
Herwartz, H. and Weber, H. (2005): ‘Exchange Rate Uncertainty and Trade Growth, a Comparison of Linear and Non-linear (forecasting) Models’. Applied Stochastic Models in Business and Industry, 12(4)
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Kandil, M. and Mirzaie, I.A. (2008). Comparative Analysis of Exchange Rate Appreciation and Aggregate Economic Activity: Theory and Evidence from Middle Eastern Countries. Bulletin of Economic Research, 60(1).
Kenen, P.B and Rodrick, D. (1986). Measuring and Analyzing the Effects of Short-term Volatility in Real Exchange Rates. Review of Economics and Statistics. 68.
Khan, A. M and Sajid, Z.M.(2005). The Exchange Rate and Monetary Dynamics in Pakistan: An Autoregressive Distributed Lag(ARDL) Approach. The Lahore Journal of Economics, 10.
Lafia Journal of Economics and Management Sciences Vol. 2 No. 1, June 2017
Koray, F, and Lastrapes, W.D. (1984). Real Exchange Rate Volatility and US Bilateral Trade. A VAR Approach’. Review of Economics and Statistics. 71 Omisakin,O., Oyinlola,A., and Adeniyi, O.(2010). Relative Responsiveness of
Trade Flows to Changes in Exchange Rate and Prices in Selected ECOWAS Countries: Does Orcutt Hypothesis Hold? Journal of Economics and International Finance. 2(6)
Ortega, R and Giovanni T. (2005). Trade Costs and Real Exchange Rate Volatility: The Role of Ricardian Comparative Advantage. Working Paper in International Monetary Fund.
Persson, T. and Sevenson, L. (1989). Why a Stubborn Conservative Would Run a Deficit Policy with Time Inconsistent Preferences. Quarterly Journal of Economics, 104
Qayyum, A and Kemal, A.R. (2006). Volatility Spillover between the Stock Market and the Foreign Market in Pakistan. Working Paper 7I. Pakistan Institute of Development Economics, Islamabad.
Rogoff, K. (1998). Perspectives on Exchange Rate Volatility in Martin Felstein (ed.) International Capital Flows. Chicago University: Chicago Press.
Sengunta, J. and Sfeir, R. (1995). Past Trend Versus Future Expectations: Test of Exchange Rate Volatility’. University of California, Santa Barbara, CA, USA and School of Business Chapman University, Orange, CA, USA.
Shehu, A.A and Youtang, Z. (2012). Exchange Volatility, Trade Flows and Economic Growth in a Small Open Economy. International Review of Business Research Papers, 8(2).
Sims C.A. J.H. Stock and Watson, M.W. (1990). Inference in Linear Time Series Models with Some Unit Roots. Econometrica, 58(1).
Sjaastad, A. L. and Manzur, M. (2008). Import Protection, Capital Flows and Real Exchange Rate Dynamics. Journal of Applied Economics. 6
Stum, J.E. (1998). Public Capital Expenditure in OECD Countries. The Causes and Impact of the Decline in Public Capital Spending. Edward Edgar Publishing Limited: Cheltenham.
Supaat S. (2003). Investigating the Relationship between Exchange Rate Volatility and Macro Economic Volatility in Singapore. Monetary Authority of Singapore (MAS) Staff Paper No.25
Toseef, A., Muhammed, J. and Aneela, K (2005). The Impact of Exchange Rate Volatility on Growth and Economic Performance: A Case Study of Pakistan. The Pakistan Development Review. 44 (4).
Virgil, H. (2001). Exchange Rate Volatility in Turkey and its Effects on Trade Flows’. Journal of Economic and Social Research. 4
Zahoor H. J and Muhammed F. (2009). Economic Growth and Exchange Rate Volatility in the Case of Pakistan. Pakistan Journal of Life and Social Sciences, 7(2).
Akhar, A.M. and Hilton, R.S. (1984). Effects of Exchange Rate Uncertainty on German and US Trade. Federal Bank of New York. Quarterly Review. 9(1).
Alexander, C. (2007). Market Models: A Guide to Financial Data Analysis. New York: John Wiley and Sons Ltd:
Aliyu, S.U.R. (2010). Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Empirical Investigation. Research Journal of International Studies. 2
Alshogeathri, M.A.M. (2011). Macroeconomic Determinants of Stock Market Movements: Empirical Evidence from the Saudi Stock Market (Unpublished Masters Dissertation), University of Manhattan, Kansas State.
Arize A.C. (1998). Real Exchange Rate Volatility and Trade Flows: The Experience of Eight European Economies. International Revenue and Economic Finance. 5
Ayinde T. O. (2014). The impact of Exchange Rate Volatility on Manufacturing Performance: New Evidence from Nigeria. Fountain Journal of Management and Social Sciences, 3(2).
Bahmani-Oskoee, M. and Kovyryalova, M. (2008). Impact of Exchange Rate Uncertainty on Trade Flows: Evidence from Commodity Trade Between the US and the UK’. The World Economy. 7(2).
Bellertov T. (1986). Generalized Autoregressive Conditional Heteroscedasticity.
Journal of Econometrics. 31.
Brada, J.C. and Mendez, J.A. (1988). Exchange rate Risk, Exchange Rate Regimes and the Volume of International Trade’. Kyklus. 41(2)
Caporale, G. M. and Pittis, N. (1995). Nominal Exchange Rate Regimes and the Stochastic Behaivour of Real Variables. Journal of International Money and Finance. 14(3)
Charemza, W. W. and Deadman, D. F. (1999). New Direction in Econometric Practice: General to Specific Modeling. Co-integration and Vector Autoregression. Edward and Igar Publishing Ltd.
Copelman M and Werner A. M (1996). The Monetary Transmission Mechanism in Mexico. Working Paper No 25 Washington D.C. Federal Reserve Board.
De grauwe, P (1988). Exchange Rate Variability and the Showdown in Growth of International Trade’. IMF Staff Papers. 35
Dickey, D. A. and Fuller, W. A. (1979). Distribution of the Estimates for Autoregressive Time-Series with a Unit Root. Journal of the American Statistical Association. 74
Doganlar, M. (2002): ‘Estimating the Impact of Exchange Rate Volatility on Exports: Evidence from Asian Countries. Journal of Applied Economic Letters, 9
Ehinomen C and Oladipo T.I (2012). Exchange Rate Management and the Manufacturing Sector Performance in Nigerian Economy. IORS Journal of Humanities and Social Science 5(5)
Engel R.F. (1982). Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation. Econometrica, 50(4).
Engle, R.F and Granger, C.W.J. (1986). Cointegration and Error Correction Representation, Estimation and Testing. Econometrica, 55
Equivel, G., and Larrain, F. B. (2002). The Impact of G-3 Exchange Rate Volatility on developing Countries. United Nations Conference on Trade and Development. G-24 Discussion Paper Series No 16, Center for International Development Harvard University.
Glauco, D. V. and Abott, A.(2004). The Impact of Exchange Rate Volatility on UK Exports to EU Countries. Scottish Journal of Political Economy, 51
Granger C.W.J. (1969). Investigating Causal Relations by Econometric Models and Cross- Spectral Methods. Econometrica, 37
Gujarati, D.N. (2003). Basic Econometrics, 4th ed. New york- McGraw-Hill
Hacker, R.S. and Hatemi, J.A. (2004). The Effects of Exchange Rates Changes on Trade Balances in the Short and Long run. Economics of Transition. 12(4)
He, C. and Terasvirta, T. (1999). Properties of Autocorrelation Function of Squared Observations for Second Order GARCH Processes Under Two Sets of Parameter Constraints. Journal of Time Series Analysis. 20
Herwartz, H. and Weber, H. (2005): ‘Exchange Rate Uncertainty and Trade Growth, a Comparison of Linear and Non-linear (forecasting) Models’. Applied Stochastic Models in Business and Industry, 12(4)
Ibikunle, J. A. and Isaac, A. (2011). An Empirical Investigation of the Link between Exchange Rate Volatility and Trade in Nigeria. Journal of Emerging Trends in Economics and Management Sciences, 2(3).
Johansen, S. and Juselius, K. (1990). Maximum likelihood Estimation and Inferences on Cointegration- with Application to the Demand for Money’. Oxford Bulletin of Economics and Statistics. 52 (2).
Kahir-Uz-Zaman (2005). Export Supply Function Estimates for the Pakistan Carpet Industry. BCID Research Paper No 9. Department of Economics Gomal University, D. I. Khan NWFP, Pakistan.
Kandil, M. and Mirzaie, I.A. (2008). Comparative Analysis of Exchange Rate Appreciation and Aggregate Economic Activity: Theory and Evidence from Middle Eastern Countries. Bulletin of Economic Research, 60(1).
Kenen, P.B and Rodrick, D. (1986). Measuring and Analyzing the Effects of Short-term Volatility in Real Exchange Rates. Review of Economics and Statistics. 68.
Khan, A. M and Sajid, Z.M.(2005). The Exchange Rate and Monetary Dynamics in Pakistan: An Autoregressive Distributed Lag(ARDL) Approach. The Lahore Journal of Economics, 10.
Lafia Journal of Economics and Management Sciences Vol. 2 No. 1, June 2017
Koray, F, and Lastrapes, W.D. (1984). Real Exchange Rate Volatility and US Bilateral Trade. A VAR Approach’. Review of Economics and Statistics. 71 Omisakin,O., Oyinlola,A., and Adeniyi, O.(2010). Relative Responsiveness of
Trade Flows to Changes in Exchange Rate and Prices in Selected ECOWAS Countries: Does Orcutt Hypothesis Hold? Journal of Economics and International Finance. 2(6)
Ortega, R and Giovanni T. (2005). Trade Costs and Real Exchange Rate Volatility: The Role of Ricardian Comparative Advantage. Working Paper in International Monetary Fund.
Persson, T. and Sevenson, L. (1989). Why a Stubborn Conservative Would Run a Deficit Policy with Time Inconsistent Preferences. Quarterly Journal of Economics, 104
Qayyum, A and Kemal, A.R. (2006). Volatility Spillover between the Stock Market and the Foreign Market in Pakistan. Working Paper 7I. Pakistan Institute of Development Economics, Islamabad.
Rogoff, K. (1998). Perspectives on Exchange Rate Volatility in Martin Felstein (ed.) International Capital Flows. Chicago University: Chicago Press.
Sengunta, J. and Sfeir, R. (1995). Past Trend Versus Future Expectations: Test of Exchange Rate Volatility’. University of California, Santa Barbara, CA, USA and School of Business Chapman University, Orange, CA, USA.
Shehu, A.A and Youtang, Z. (2012). Exchange Volatility, Trade Flows and Economic Growth in a Small Open Economy. International Review of Business Research Papers, 8(2).
Sims C.A. J.H. Stock and Watson, M.W. (1990). Inference in Linear Time Series Models with Some Unit Roots. Econometrica, 58(1).
Sjaastad, A. L. and Manzur, M. (2008). Import Protection, Capital Flows and Real Exchange Rate Dynamics. Journal of Applied Economics. 6
Stum, J.E. (1998). Public Capital Expenditure in OECD Countries. The Causes and Impact of the Decline in Public Capital Spending. Edward Edgar Publishing Limited: Cheltenham.
Supaat S. (2003). Investigating the Relationship between Exchange Rate Volatility and Macro Economic Volatility in Singapore. Monetary Authority of Singapore (MAS) Staff Paper No.25
Toseef, A., Muhammed, J. and Aneela, K (2005). The Impact of Exchange Rate Volatility on Growth and Economic Performance: A Case Study of Pakistan. The Pakistan Development Review. 44 (4).
Virgil, H. (2001). Exchange Rate Volatility in Turkey and its Effects on Trade Flows’. Journal of Economic and Social Research. 4
Zahoor H. J and Muhammed F. (2009). Economic Growth and Exchange Rate Volatility in the Case of Pakistan. Pakistan Journal of Life and Social Sciences, 7(2).
Published
2019-06-22
Section
Articles
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