Commenced in January 2007
Frequency: Monthly
Edition: International
Paper Count: 30067
Exchange Rate Volatility, Its Determinants and Effects on the Manufacturing Sector in Nigeria

Authors: Chimaobi V. Okolo, Onyinye S. Ugwuanyi, Kenneth A. Okpala

Abstract:

This study evaluated the effect of exchange rate volatility on the manufacturing sector of Nigeria. The flow and stock market theories of exchange rate determination was adopted considering macroeconomic determinants such as balance of trade, trade openness, and net international investment. Furthermore, the influence of changes in parallel exchange rate, official exchange rate and real effective exchange rate was modeled on the manufacturing sector output. Vector autoregression techniques and vector error correction mechanism were adopted to explore the macroeconomic determinants of exchange rate fluctuation in Nigeria and to examine the influence of exchange rate volatility on the manufacturing sector output in Nigeria. The exchange rate showed an unstable and volatile movement in Nigeria. Official exchange rate significantly impacted on the manufacturing sector of Nigeria and shock to previous manufacturing sector output caused 60.76% of the fluctuation in the manufacturing sector output in Nigeria. Trade balance, trade openness and net international investments did not significantly determine exchange rate in Nigeria. However, own shock accounted for about 95% of the variation of exchange rate fluctuation in the short-run and long-run. Among other macroeconomic variables, net international investment accounted for about 2.85% variation of the real effective exchange rate fluctuation in the short-run and in the long-run. Monetary authorities should maintain stability of the exchange rates through proper management so as to encourage local production and government should formulate and implement policies that will develop other sectors of the economy as this will widen the country’s revenue base, reduce our over reliance on oil sector for our foreign exchange earnings and in turn reduce the shocks on our domestic economy.

Keywords: Exchange rate volatility, exchange rate determinants, manufacturing sector, official exchange rate, parallel exchange rate, real effective exchange rate.

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1340090

Procedia APA BibTeX Chicago EndNote Harvard JSON MLA RIS XML ISO 690 PDF

References:


[1] Benita, G. and Lauterbach, B. (2007) “Policy Factors and Exchange Rate Volatility: Panel Data versus a Specific Country Analysis”. International Research Journal of Finance and Economics, Issue 7.
[2] Betts, C. M. and Kehoe, T. J. (2001) Tradability of Goods and Real Exchange Rate Fluctuations. Paper presented at a seminar, January.
[3] Betts, C. M. and Kehoe, T. J. (2005) “U.S. Real Exchange Rate Fluctuations and Relative Price Fluctuations”. Federal Reserve Bank of Minneapolis Research Department Staff Report, No. 334, May.
[4] Engel, C. (1999) “Accounting for U.S. Real Exchange Rate Changes”. Journal of Political Economy, Vol. 107, pp.507-538.
[5] Ihrig, J. and Prior, D. (2003) “The Effect of Exchange Rate Fluctuations on Multinationals’ Returns”. Board of Governors of the Federal Reserve System International Finance Discussion Papers, No. 782, October.
[6] Kandil, M. (2004) “Exchange rate fluctuations and economic activity in Developing Countries: Theory and Evidence”. Journal of Economic Development, Vol. 29, No. 1.
[7] Khan, M. L., Mohammad, S. D. and Alamgir, (2010) “The Sources of Real Exchange Rate Fluctuations in Pakistan”. European Journal of Social Sciences, Vol. 14, No. 1.
[8] Kiptui, M., Ndolo, D. and Kaminchia, S. (2005) “Exchange Rate Pass-Through: To What Extent Do Exchange Rate Fluctuations Affect Import Prices and Inflation in Kenya?” Central Bank of Kenya Working Paper, No 1.
[9] Kutan, A. M. and Dibooglu, S. (1998) “Sources of Real and Nominal Exchange Rate Fluctuations in Transition Economies”. Federal Reserve Bank of ST. Louis Working Paper 1991-002A. Available from: http://www.reseach.stlouisfed.org/wp/1998/1998-022.pdf
[10] MacDonald, R. (1997) “What determines Real Exchange Rates? The Long and Short of it”. IMF Working Paper, No. WP/97/21.
[11] Mahidhar, V. (2006) Managing in the Face of Exchange-Rate Uncertainty: A Case for Operational Hedging. Deloitte Research.
[12] Sekkat, K. and Mansour, J. K. (2000) “Imperfect Competition and Sectoral Sensitivity to Exchange Rate Fluctuations in Europe”. Dulbea, Ecare, Université Libre deBruxelles. Available from: http://homepages.ulb.ac.be/~jmalek/research/Imperf.pdf
[13] Utomi, P. (2004), The Curse of Oil. In: Heinrich Böll Foundation Oil-Conference. Lagos: Lagos Business School.
[14] Onuorah, A.C. and Osuji, C.C. 92014). Exchange Rate and Economic Growth in Nigeria, International Journal of Management Sciences, Vol. 2, No. 2, Pg. 78-87
[15] Nwanna, T.F.I. (2014). Assessing the Relationship between Diversification of Non-Oil Export Product and Economic Growth in Nigeria, European Journal of Accounting, Auditing and Finance Research, Vol. 2, No. 10, Pg. 136-146.
[16] Ezeanyeji, C. and Onwueteka, I.C. (2016). Determinants of Exchange Rate Sensitivity on the Nigerian Manufacturing Sector, Economy, Vol. 3, No. 1, Pg. 40-50.