Exchange Rate Volatility and the Relative Effectiveness of Monetary and Fiscal Policies on the Nigerian Economy: An ARDL Model Approach

Abstract

In Nigeria, regrettably, exchange rate has continued to maintain steady disequilibrium trend over the years and its stability in the near future seems not to be possible given the unfavorable macroeconomic conditions such as high inflation rate, interest rate differentials, depletion of foreign reserves, structural deficiency in the economy which are among the factors responsible for exchange rate depreciation in Nigeria. This study is an attempt to investigate the effect of exchange rate volatility and the relative effectiveness of monetary and fiscal policies on economic growth of Nigeria for the period 1981-2018 with specific objectives.; to determine the effect of exchange rate volatility on economic growth in Nigeria, to ascertain the relative effect of monetary policy on economic growth in Nigeria, to investigate the relative effect of fiscal policy on economic growth in Nigeria and to determine the joint effects of monetary and fiscal policies on economic growth in Nigeria. The specified model was estimated using the Autoregressive Distributive lag Model to determine the level of impact that one variable has on the other. While E-views 10 statistical software was employed in computing the result, time series data were obtained from World Bank national accounts data and OECD National Accounts data files and the study established that Exchange Rate Volatility (EXRVT) is ineffective on its effect and influence on economic growth (RGDP) of Nigeria, Broad Money Supply (LM2)had a negative a positive relationship with economic growth (RGDP) in the short run and in the long run at 5% level of significance while Inflation Rate (INFR) had a negative and statistical relationship with RGDP in the current year and also in the long run at 5% level of significance and finally, Total Government Expenditure (LTGEXP) had a negative relationship with RGDP in the short run and in the long run but statistically insignificantly at 5% level of significance. Based on the findings, the study recommended that efforts should be made to ensure exchange rate stability in order to stabilize Nigeria's economy and that they government should  do  everything  economically  possible  to  strengthen  the  value  of Naira in  the FOREX market.  This however excludes pumping billions of dollars into the FOREX market as this only creates a temporary economic condition.