A Novel Bootstrap Approach for the Effect of Exchange Rate Shocks on Growth Performance in Nigeria

While shocks driven by exchange rate volatility and its impact on growth have been investigated in the extant literature, the recent exchange depreciation of major currencies has reignited interest among scholars. This study scrutinizes a novel Bootstrap Autoregressive Distributed Lag (BARDL) model for the effect of exchange rate shocks on the growth of the Nigerian economy. The results reveal several key findings. First, the finding from the bootstrap bound test revealed the presence of a cointegration relation between exchange rate and economic growth, indicating that exchange rate is a key indicator of inducing growth performance in Nigeria in the long-run horizon. Second, the results also show an inverted U-shaped effect of exchange rate on growth performance in the short-run horizon. This finding indicates that the coexistent positive effect of exchange rate shock on growth metamorphosed into a negative effect within a second lag. Third, while exchange rate depreciation retards economic growth in the short-run, the pattern demonstrates a strong potential for currency devaluation on external trade competitiveness of Nigeria. Fourth, the finding from the nonlinear model reveals the existence of strong asymmetries in exchange rate and economic growth nexus which validate the J-curve effect in Nigeria. The shocks driven from trade, particularly the import shocks are exacerbating the instability in the exchange market. Thus, controlling the asymmetric effects of exchange rate and import shocks is key to the sustainable growth of the Nigerian economy.