IIARD International Institute of Academic Research and Development

IIARD INTERNATIONAL JOURNAL OF BANKING AND FINANCE RESEARCH (IJBFR )

E-ISSN 2695-1886
P-ISSN 2672-4979
VOL. 6 NO. 3 2020

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The Relationship between Exchange Rate Volatility and Monetary Policy Shocks in Nigeria.

Arikekpar, Obaima Ateibueri

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Abstract

The aim of this study is to examine the relationship between exchange rate volatility and monetary policy shocks in Nigeria. The results of past empirical studies have not shown a clear direction about the nature of relationship between these variables in the country and these studies have failed to utilize the methodology adopted in this work, which has created a gap in the literature. Data was collected from the Central Bank of Nigeria Statistical Bulletin from 1981– 2018 and various diagnostic tests such as Unit Roots and Johansen Co-integration test were carried out. Consequently, Vector Error Correction Mechanism (VECM) was utilized to address the objective of this study. From the results of this work, it was discovered that credit reserve requirement has a negative relationship with exchange rate. However, broad money supply, interest rate and inflation rate have a positive relationship with exchange rate in the country. Furthermore, due to these important findings, this paper makes the following vital policy recommendations for the monetary authorities, policy makers, financial institutions regulators and future researchers. Due to the high volatility in exchange rate in Nigeria currently, the monetary authorities should increase the credit reserve requirement of the commercial banks. Also, the Central bank should increase interest rate to the commercial banks. The multiplier effect of this policy will reduce the level of high powered money and consequently stabilize the exchange rate.

keywords:

Monetary Policy, Exchange Rate, Real and Normal rate

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