Exchange Rate Volatility and Inclusive Growth: The Nigerian Experience

Abstract

This study investigates the influence of exchange rate volatility on inclusive growth in Nigeria, using a Vector Error Correction (VEC) estimation technique. The period of the study is 1981 to 2014. The study shows that volatility in exchange rate has increased the unemployment rate which has made the growth rate in GDP experienced over the years not to be inclusive. The volatility in exchange rate does not promote investment and create room for absorptive capacity in the economy. The results from the variance decomposition show that the total variance in exchange rate volatility is significant.Based on the above revelation, it is recommended that the monetary authority, Central Bank of Nigeria (CBN) should include in its policy objectives the pursuance of weak exchange rate targeting. Fixing exchange rate, at all costs, should be discouraged. This is because the policy of fixing exchange rate without regard for inflation is misguided. The policy of raising interest rates to control inflation without paying attention to what is happening to the exchange rate is counter productive. Nevertheless, flexibility in the exchange rate should be welcomed since it enables a country to cope with macroeconomic shocks arising from policy changes. Monetary authority should avoid unhealthy speculation in the foreign exchange, as well as a rent-seeking behaviour and adopt positive attitudes geared towards ensuring a stable naira exchange rate.