Exchange Rate Volatility and Manufacturing Sector’s Performance in Nigeria: A Toda-Yamamoto Approach

Samuel Orekoya; Joseph Afolabi

Samuel Orekoya Department of Economics, University of Ibadan
Joseph Afolabi Nigerian Institute of Social and Economic Research, Ibadan

Keywords: Exchange rate volatility, index of industrial production, Toda-Yamamoto model, VAR

Abstract

This study investigates the effects of volatility in exchange rate on manufacturing sector’s performance in Nigeria and the sector’s response to shocks from this volatility. It adopts the Toda-Yamamoto variant of vector autoregressive (VAR) model on data from 1986M1 to 2019M12. Exchange rate volatility (ERV) was generated using the ARCH/GARCH model and was found to attenuate rapidly and non-persistence. Impulse response result shows that manufacturing sector’s performance responds negatively to shocks from ERV while the variance decomposition reveals that ERV accounts for an increasing change in manufacturing sector’s performance in Nigeria. This shows that volatility in exchange rate could be deleterious to manufacturing sector’s performance. Interest rate was also found to have significant influence on output. The paper therefore recommends that the monetary authority should continually watch exchange rate with a view to mitigating against its excessive volatility. A moderately low interest rate could also be pursued to aid manufacturing sector’s performance as estimation result indicates that a positive shock to exchange rate negatively affects the performance of the sector.

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