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A PARAMETRIC MEASURE OF EXCHANGE RATE VOLATILITY AND ITS IMPACT ON MANUFACTURING OUTPUT IN NIGERIA
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.
Keywords: Exchange rate, monetary policy, manufacturing economic growth,