A Parametric Measure of Exchange Rate Volatility and Its Impact on Manufacturing Output in Nigeria
Keywords:
Exchange rate, monetary policy, manufacturing economic growth
Abstract
The link between exchange rate volatility and manufacturing sector performance remains a topical issue among economists and policymakers, as the sector has become increasingly dependent on the external sector for import of non-labour input. This study examined the relationship between exchange rate volatility and manufacturing output growth in Nigeria from 1970 to 2014 using non-parametric measure of volatility of the mean and standard deviation of exchange rate and parametric Generalised Autoregressive Conditional Heteroscedasticity (GARCH). The study found that, among others that: the standard deviation of exchange rate is unusually high and unusually low, suggesting that there is a substantial volatility in the exchange rate over the period under study; the degree of openness was negatively related to the contribution of manufacturing to gross domestic product and, as such, the recent trade liberalization efforts in Nigeria had not resulted in better manufacturing subsector performance or benefited the poor; and that both broad money supply (M2) and total government expenditure (TGE) were positively related to manufacturing subsector growth performance. The empirical results confirmed that exchange rate volatility have a significant negative effect on manufacturing sector performance. This implied that a policy that will enhance stability of the exchange rate will promote manufacturing sector growth performance; hence, government should not underplay exchange rate volatility in Nigeria, as it affects other important factors for manufacturing sector performance.
References
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Adelowokan O.A, Adesoye A. B., and Balogun O. D. (2015). Exchange Rate Volatility on Investment and Growth in Nigeria, an Empirical Analysis. Global Journal of Management and Business Research, 5(10)
Adeola, A and Olofin S.O (2000). Economic policy and manufacturing sector growth performance in Africa. Nigerian Journal of Economic and Social Studies, 42(1): 1-22
Adewuyi, A.O (2005). Trade and Exchange Rate Policies and Economic Performance in Nigeria: An Empirical Analysis. Nigerian J. Econ. Social Studies, 47, 249-280
Aggarwal, R., Inclan, C., and Leal, R. (1999). Volatility in Emerging Stock Markets. Journal of Financial and Quantitative Analysis, 34, 33-55.
Akgiray, V. (1989). Conditional Heteroscedasticity in Time Series of Stock Returns: Evidence and Forecasts. The Journal of Business, 62(1), 55-88.
Akinlo, O.O; and Lawal, Q.A (2015). Impact of Exchange Rate on Industrial Production in Nigeria. International Business and Management, 10(1), 104-110
Andreou, E., and Ghysels, E. (2002). Detecting Multiple Breaks in Financial Market Volatility Dynamics. Journal of Applied Econometrics, 17(5), 578-600.
Ayinde, T. O (2014). The Impact of Exchange Rate Volatility on Manufacturing Performance: New Evidence from Nigeria. Fountain Journal of Management and Social Sciences, 3(2), 83-92
Bahmani-Oskooee, M., and Kandil, M (2007). Exchange Rate Fluctuations and Output in Oil Producing Countries: The Case of Iran. IMF Working Paper
Bakare A.S (2011). The Consequences of Foreign Exchange Rate Reforms on the Performances of Private Domestic Investment in Nigeria. International Journal of Economics and Management Sciences,1(1), 25-31
Bera, A. K., and Higgins, M. L. (1993). ARCH Models: Properties, Estimation and Testing. Journal of Economic Survey, 7, 305-362.
Betts, C., and Devereux, M.B (1996). The Exchange Rate in a Model of Pricing-to-Market. European Economic Review, 40, 1007–21.
Bollersler, T. (1986). Generalised Autoregressive Conditional Heteroscedasticity, Journal of Econometrics, 31, 307-327
Carranza, L.J., Cayo, J.M., and Galdon-Sanchez, J.E. (2007). Exchange Rate Volatility and Economic Performance in Peru: A Firm-Level Analysis. Falcultad de Gencias Economicas Empressariales Universidad de Navarra.
Carrera, J., and Vuletin, G. (2002). The effects of exchange rate regimes on real exchange rate volatility: A dynamic panel data approach. University of Maryland Working Paper.
Central Bank of Nigeria (2009). 50 Years of Central Banking in Nigeria, 1958-2008
Clarida, H.R. (1997). The Real Exchange Rate and U.S. Manufacturing Profits: A Theoretical Framework with Some Empirical Support. Columbia University. The
National Bureau of Economic Research. Federal Reserves Bank of New York, USA
Conally, R. A. (1989). An Examination of the Robustness of the Weekend Effect. Journal of Financial and Quantitative Analysis, 24, pp. 133-169.
Cookey, A.C; and Onuchuku, O (2009). A Survey of Sources and Conditions of Credit to Small Scale Manufacturing Firms and their Impact on Performance: A Case Study of Aba, South East Nigeria. Nigerian Journal of Monetary Economics, 3(4)
Danladi, J.P., and Uba, U.P. (2016). Does the volatility of exchange rate affect the economic performance of countries in the West African Monetary zone? A case of Nigeria and Ghana. British Journal of Economics, Management and Trade, 11(3): 1-10
Devereux, M., and Engel, C. (2003). Monetary Policy in Open Economy Revisited: Price Setting and Exchange Rate Flexibility. Review of Economic Studies 70(4), 765 783.
Diaz-Alejandro, C.F (1963). A Note on the Impact of Devaluation and Redistribution Effects. J. Political Econ., 71:580.
Dornbusch, R. (1976). Expectations and Exchange Rate Dynamics. Journal of Political Economy 84(6), pp 1161–76.
Driskill, R., and McCafferty, S (1980). Exchange-Rate Variability, Real and Monetary Shocks, and the Degree of Capital Mobility under Rational Expectations. Quarterly Journal of Economics, 95, 577–86
Driskill, R., and McCafferty, S (1987). Exchange Rate Determination: An Equilibrium Approach with Imperfect Capital Substitutability. Journal of International Economics, 23, 241–61.
Edwards, S. (1992). Real and Monetary Determinants of Real Exchange Rate Behaviour: Theory and Evidence from Developing Countries. In: Williamson, J. (ed.). Estimating Equilibrium Exchange Rates, Washington: Institute for International Economics,.
Ehinomen, C., and Oladipo, T.I (2012). Exchange rate management and the manufacturing sector performance in the Nigerian Economy. IOSR Journal of Humanities and Social Science 5(5): 1 – 12.
Enekwe, C.I., Ordu, M.M. and Nwoha C. (2013). Effect of exchange rate fluctuations on manufacturing sector in Nigeria. European Journal of Business and Management, 5(22).
Engle, R. F. (1982). Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of the UK Inflation. Econometrica, 50, 987-1007
Engle, R.I., and Granger, C.W. (1987). Cointegration and Error Correction: Representation, Estimation and Testing. Econometrica, 55(2): 251-276.
Floros, C. (2009). Modelling Volatility Using GARCH Models: Evidence from Egypt and Israel.
Fry, M.J (1976). Monetary Approach to Afghanistan’s Flexible Exchange Rate. Journal of Money, Credit and Banking, 8:219-225.
Gadanecz, B., and Mehrotra, A. (2013). The Exchange Rate, Real Economy and Financial Markets. BIS Papers, No 73.
Glynn, J., Perera, N., and Verma, R (2007). Unit Root Tests and Structural Breaks: A Survey with Applications. Revista de Metodos Cuantitativos para la Econom ia y la Empresa, 3, 63-79.
Hook, L.S., and Boon, T.H. (2000). Real Exchange Rate Volatility and Malaysian Exports to its Major Trading Partners. Working Paper 6, Universiti Putra Malaysia
Huchet-Bourdon, M. and Korinek, J., (2011). To What Extent Do Exchange Rates and their Volatility Affect Trade? OECD Trade Policy Papers, No. 119, OECD, Publishing.
Jamil, M., Streissler, E.W., and Kunst, R.M. (2012). Exchange Rate Volatility and its Impact on Industrial Production, Before and After the Introduction of Common Currency in Europe. International Journal of Economics and Financial Issues, 2(2), 85-109.
Kanagaraj, A., and Ekta, S. (2011). A Firm Level Analysis of the Exchange Rate Exposure of Indian Firms. Journal of Applied Finance and Banking, 1(4), 163-184.
Kandil, M (2004). Exchange Rate Fluctuations and Economic Activity in Developing Countries: Theory and Evidence. J. Econ. Dev., 29, 85-108.
Lyons, R.K (1992). Floating Rates in Peru, 1950-54. Journal of Development Economics, 38: 99-118.
MacDonald, R., and Nagayasu, J. (1999). The Long-Run Relationship between Real Exchange Rates and Real Interest Rate Differentials: A Panel Study. IMF Working Paper No. 99/ 37.
Manuelli, R. E., and Peck, J (1990). Exchange Rate Volatility in an Equilibrium Asset Pricing Model. International Economic Review, 31, 559–74 Manufacturers Association of Nigeria (MAN). Newsletter Publication (Various Issues)
McKenzie, M. D. (1999). The impact of exchange rate volatility on Australian trade flows, Journal of International Financial Market, Institutions and Money, 8, 21-38. Middle Eastern Finance and Economics, 2, 31-41.
McKinnon, R (1963). Optimal Currency Areas. American Economic Review, 53, 717-724. Mundel, R.A (1961). International Economics. New York: Macmillan
Obstfeld, M., and Rogoff, K (1998). The Mirage of Fixed Exchange Rates. Journal of Economic Perspectives, 9, 73-96.
Okigbo, P.M (1993), Essays in Public Philosophy of Development, Lectures on the Structural Adjustment Programme, 4, Enugu, Fourth Edition.
Olisadebe (1991) in Owolabi A.U, and Adegbite, T.A (2012). The Effect of Exchange Rate Volatility on Nigeria Economy. International Journal of Academic Research in Economics and Management Sciences, 2(6)
Opaluwa, D. J. C. Umeh., and Abu, A.A.(2010). The Effect of Exchange Rate Fluctuations on the Nigerian Manufacturing Sector, African Journal of Business Management, 4(14), 2994-2998.
Oyejide, T.A. (1985). Exchange Rate Policy for Nigeria: Some Options and their Consequences. Proceedings of the 1985 One-Day Workshop. Nigerian Economic Society
Paul, A., and Muazu, I (2016). On the causes and effects of exchange rate volatility on economic growth: Evidence from Ghana. The International Growth Centre (IGC) Working Paper
Perron, P. (1989). The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis. Econometrica, 57, 1361-1401.
Perron, P. (1997). Further Evidence on Breaking Trend Functions in Macroeconomic Variables. Journal of Econometrics, 80, 355-385.
Perron, P. (2006). Dealing with Structural Breaks. Palgrave Handbook of Econometrics, 1, 278-352.
Pierrer-Richard, A. (1991). Output, Devaluation and Real Exchange Rate in Developing Countries. Weltwirtschaftliches Arch, 127, 18-41
Schnabl, G. (2007). Exchange Rate Volatility and Growth in Small Open Economies at the EMU Periphery, European Central Bank Working Paper No 773.
Sensier, M., and Van Dijk, D. (2004). Testing for Volatility Changes in US Macroeconomic Time Series. Review of Economics and Statistics. 86(3), 833-839.
Simon-Oke, O. O., and Aribisala, S.E. (2010). Exchange Rate Deregulation and Industrial Performance: An Assessment (1975 – 2006). African Research Review, 4(2)
Turnovsky, S. J., and Jagdeep S. B (1982). The Degree of Capital Mobility and the Stability of an Open Economy under Rational Expectations. Journal of Money, Credit and Banking, 14, 303–26
Ukoha, O.O (2000). Determinants of Manufacturing Capacity Utilization in Nigeria. The Nigerian Journal of Economic and Social Studies, 42(1), 121-129 World Bank (1987). World Development Report. Washington D.C
Yaqub, J.O (2010). Exchange Rate Changes and Output Performance in Nigeria: A Sectorial Analysis. Pakistan Journal of Social Sciences, 7(5): 380-387.
Zainudin, R., and Shaharudin, R. (2011). An Investigation of Structural Breaks on Spot and Futures Crude Palm Oil Returns. Australian Journal of Basic and Applied Sciences. 5(9), 1872-1885.
Zivot, E., and Andrews, D. W. K. (1992). Further Evidence of the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis. Journal of Business and Economic Statistics, 10, 251-270.
Adelowokan O.A, Adesoye A. B., and Balogun O. D. (2015). Exchange Rate Volatility on Investment and Growth in Nigeria, an Empirical Analysis. Global Journal of Management and Business Research, 5(10)
Adeola, A and Olofin S.O (2000). Economic policy and manufacturing sector growth performance in Africa. Nigerian Journal of Economic and Social Studies, 42(1): 1-22
Adewuyi, A.O (2005). Trade and Exchange Rate Policies and Economic Performance in Nigeria: An Empirical Analysis. Nigerian J. Econ. Social Studies, 47, 249-280
Aggarwal, R., Inclan, C., and Leal, R. (1999). Volatility in Emerging Stock Markets. Journal of Financial and Quantitative Analysis, 34, 33-55.
Akgiray, V. (1989). Conditional Heteroscedasticity in Time Series of Stock Returns: Evidence and Forecasts. The Journal of Business, 62(1), 55-88.
Akinlo, O.O; and Lawal, Q.A (2015). Impact of Exchange Rate on Industrial Production in Nigeria. International Business and Management, 10(1), 104-110
Andreou, E., and Ghysels, E. (2002). Detecting Multiple Breaks in Financial Market Volatility Dynamics. Journal of Applied Econometrics, 17(5), 578-600.
Ayinde, T. O (2014). The Impact of Exchange Rate Volatility on Manufacturing Performance: New Evidence from Nigeria. Fountain Journal of Management and Social Sciences, 3(2), 83-92
Bahmani-Oskooee, M., and Kandil, M (2007). Exchange Rate Fluctuations and Output in Oil Producing Countries: The Case of Iran. IMF Working Paper
Bakare A.S (2011). The Consequences of Foreign Exchange Rate Reforms on the Performances of Private Domestic Investment in Nigeria. International Journal of Economics and Management Sciences,1(1), 25-31
Bera, A. K., and Higgins, M. L. (1993). ARCH Models: Properties, Estimation and Testing. Journal of Economic Survey, 7, 305-362.
Betts, C., and Devereux, M.B (1996). The Exchange Rate in a Model of Pricing-to-Market. European Economic Review, 40, 1007–21.
Bollersler, T. (1986). Generalised Autoregressive Conditional Heteroscedasticity, Journal of Econometrics, 31, 307-327
Carranza, L.J., Cayo, J.M., and Galdon-Sanchez, J.E. (2007). Exchange Rate Volatility and Economic Performance in Peru: A Firm-Level Analysis. Falcultad de Gencias Economicas Empressariales Universidad de Navarra.
Carrera, J., and Vuletin, G. (2002). The effects of exchange rate regimes on real exchange rate volatility: A dynamic panel data approach. University of Maryland Working Paper.
Central Bank of Nigeria (2009). 50 Years of Central Banking in Nigeria, 1958-2008
Clarida, H.R. (1997). The Real Exchange Rate and U.S. Manufacturing Profits: A Theoretical Framework with Some Empirical Support. Columbia University. The
National Bureau of Economic Research. Federal Reserves Bank of New York, USA
Conally, R. A. (1989). An Examination of the Robustness of the Weekend Effect. Journal of Financial and Quantitative Analysis, 24, pp. 133-169.
Cookey, A.C; and Onuchuku, O (2009). A Survey of Sources and Conditions of Credit to Small Scale Manufacturing Firms and their Impact on Performance: A Case Study of Aba, South East Nigeria. Nigerian Journal of Monetary Economics, 3(4)
Danladi, J.P., and Uba, U.P. (2016). Does the volatility of exchange rate affect the economic performance of countries in the West African Monetary zone? A case of Nigeria and Ghana. British Journal of Economics, Management and Trade, 11(3): 1-10
Devereux, M., and Engel, C. (2003). Monetary Policy in Open Economy Revisited: Price Setting and Exchange Rate Flexibility. Review of Economic Studies 70(4), 765 783.
Diaz-Alejandro, C.F (1963). A Note on the Impact of Devaluation and Redistribution Effects. J. Political Econ., 71:580.
Dornbusch, R. (1976). Expectations and Exchange Rate Dynamics. Journal of Political Economy 84(6), pp 1161–76.
Driskill, R., and McCafferty, S (1980). Exchange-Rate Variability, Real and Monetary Shocks, and the Degree of Capital Mobility under Rational Expectations. Quarterly Journal of Economics, 95, 577–86
Driskill, R., and McCafferty, S (1987). Exchange Rate Determination: An Equilibrium Approach with Imperfect Capital Substitutability. Journal of International Economics, 23, 241–61.
Edwards, S. (1992). Real and Monetary Determinants of Real Exchange Rate Behaviour: Theory and Evidence from Developing Countries. In: Williamson, J. (ed.). Estimating Equilibrium Exchange Rates, Washington: Institute for International Economics,.
Ehinomen, C., and Oladipo, T.I (2012). Exchange rate management and the manufacturing sector performance in the Nigerian Economy. IOSR Journal of Humanities and Social Science 5(5): 1 – 12.
Enekwe, C.I., Ordu, M.M. and Nwoha C. (2013). Effect of exchange rate fluctuations on manufacturing sector in Nigeria. European Journal of Business and Management, 5(22).
Engle, R. F. (1982). Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of the UK Inflation. Econometrica, 50, 987-1007
Engle, R.I., and Granger, C.W. (1987). Cointegration and Error Correction: Representation, Estimation and Testing. Econometrica, 55(2): 251-276.
Floros, C. (2009). Modelling Volatility Using GARCH Models: Evidence from Egypt and Israel.
Fry, M.J (1976). Monetary Approach to Afghanistan’s Flexible Exchange Rate. Journal of Money, Credit and Banking, 8:219-225.
Gadanecz, B., and Mehrotra, A. (2013). The Exchange Rate, Real Economy and Financial Markets. BIS Papers, No 73.
Glynn, J., Perera, N., and Verma, R (2007). Unit Root Tests and Structural Breaks: A Survey with Applications. Revista de Metodos Cuantitativos para la Econom ia y la Empresa, 3, 63-79.
Hook, L.S., and Boon, T.H. (2000). Real Exchange Rate Volatility and Malaysian Exports to its Major Trading Partners. Working Paper 6, Universiti Putra Malaysia
Huchet-Bourdon, M. and Korinek, J., (2011). To What Extent Do Exchange Rates and their Volatility Affect Trade? OECD Trade Policy Papers, No. 119, OECD, Publishing.
Jamil, M., Streissler, E.W., and Kunst, R.M. (2012). Exchange Rate Volatility and its Impact on Industrial Production, Before and After the Introduction of Common Currency in Europe. International Journal of Economics and Financial Issues, 2(2), 85-109.
Kanagaraj, A., and Ekta, S. (2011). A Firm Level Analysis of the Exchange Rate Exposure of Indian Firms. Journal of Applied Finance and Banking, 1(4), 163-184.
Kandil, M (2004). Exchange Rate Fluctuations and Economic Activity in Developing Countries: Theory and Evidence. J. Econ. Dev., 29, 85-108.
Lyons, R.K (1992). Floating Rates in Peru, 1950-54. Journal of Development Economics, 38: 99-118.
MacDonald, R., and Nagayasu, J. (1999). The Long-Run Relationship between Real Exchange Rates and Real Interest Rate Differentials: A Panel Study. IMF Working Paper No. 99/ 37.
Manuelli, R. E., and Peck, J (1990). Exchange Rate Volatility in an Equilibrium Asset Pricing Model. International Economic Review, 31, 559–74 Manufacturers Association of Nigeria (MAN). Newsletter Publication (Various Issues)
McKenzie, M. D. (1999). The impact of exchange rate volatility on Australian trade flows, Journal of International Financial Market, Institutions and Money, 8, 21-38. Middle Eastern Finance and Economics, 2, 31-41.
McKinnon, R (1963). Optimal Currency Areas. American Economic Review, 53, 717-724. Mundel, R.A (1961). International Economics. New York: Macmillan
Obstfeld, M., and Rogoff, K (1998). The Mirage of Fixed Exchange Rates. Journal of Economic Perspectives, 9, 73-96.
Okigbo, P.M (1993), Essays in Public Philosophy of Development, Lectures on the Structural Adjustment Programme, 4, Enugu, Fourth Edition.
Olisadebe (1991) in Owolabi A.U, and Adegbite, T.A (2012). The Effect of Exchange Rate Volatility on Nigeria Economy. International Journal of Academic Research in Economics and Management Sciences, 2(6)
Opaluwa, D. J. C. Umeh., and Abu, A.A.(2010). The Effect of Exchange Rate Fluctuations on the Nigerian Manufacturing Sector, African Journal of Business Management, 4(14), 2994-2998.
Oyejide, T.A. (1985). Exchange Rate Policy for Nigeria: Some Options and their Consequences. Proceedings of the 1985 One-Day Workshop. Nigerian Economic Society
Paul, A., and Muazu, I (2016). On the causes and effects of exchange rate volatility on economic growth: Evidence from Ghana. The International Growth Centre (IGC) Working Paper
Perron, P. (1989). The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis. Econometrica, 57, 1361-1401.
Perron, P. (1997). Further Evidence on Breaking Trend Functions in Macroeconomic Variables. Journal of Econometrics, 80, 355-385.
Perron, P. (2006). Dealing with Structural Breaks. Palgrave Handbook of Econometrics, 1, 278-352.
Pierrer-Richard, A. (1991). Output, Devaluation and Real Exchange Rate in Developing Countries. Weltwirtschaftliches Arch, 127, 18-41
Schnabl, G. (2007). Exchange Rate Volatility and Growth in Small Open Economies at the EMU Periphery, European Central Bank Working Paper No 773.
Sensier, M., and Van Dijk, D. (2004). Testing for Volatility Changes in US Macroeconomic Time Series. Review of Economics and Statistics. 86(3), 833-839.
Simon-Oke, O. O., and Aribisala, S.E. (2010). Exchange Rate Deregulation and Industrial Performance: An Assessment (1975 – 2006). African Research Review, 4(2)
Turnovsky, S. J., and Jagdeep S. B (1982). The Degree of Capital Mobility and the Stability of an Open Economy under Rational Expectations. Journal of Money, Credit and Banking, 14, 303–26
Ukoha, O.O (2000). Determinants of Manufacturing Capacity Utilization in Nigeria. The Nigerian Journal of Economic and Social Studies, 42(1), 121-129 World Bank (1987). World Development Report. Washington D.C
Yaqub, J.O (2010). Exchange Rate Changes and Output Performance in Nigeria: A Sectorial Analysis. Pakistan Journal of Social Sciences, 7(5): 380-387.
Zainudin, R., and Shaharudin, R. (2011). An Investigation of Structural Breaks on Spot and Futures Crude Palm Oil Returns. Australian Journal of Basic and Applied Sciences. 5(9), 1872-1885.
Zivot, E., and Andrews, D. W. K. (1992). Further Evidence of the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis. Journal of Business and Economic Statistics, 10, 251-270.
Published
2016-09-01
Section
Articles
