The Implication of Exchange Rate Volatility on Nigeria’s External Reserves: 1980-2020

Abstract

Given the volatile nature of the exchange rate in Nigeria and the dynamics in the external reserves of the nation which are kept in foreign currency (dollar), this paper examined the impact of exchange rate shocks on the Nigerian external reserves using annual data from 1980 to 2019. Employing the Autoregressive Distributed Lag model, the results of the study indicates that exchange rate has an asymmetric impact on reserves, suggesting that the partial sum of exchange rate differ in magnitude and size relative to reserves in both positive and negative direction. The impact of a positive shock in exchange rate on reserves is statistically significant while the effect of a negative shock in exchange on reserve is statistically insignificant in the long-run. The same relationship holds for the short-run effect, although, both the positive and the negative short-run effects are statistically insignificant. The study therefore recommends that monetary authority should strengthens the exchange rate by adopting a flexible exchange floating and making it to thrives in order to boost reserves. Some of these policies could include allowing the market forces to determine the exchange rate and harmonizing the exchange rate position of the country.