IMPACT OF EXCHANGE RATE VOLATILITY ON ECONOMIC GROWTH: A CASE STUDY OF A SMALL OPEN ECONOMY

Abstract The paper examined d impact of exchange rate volatility on the economic growth in Nigeria. Using annual time series data from 1980 to 2024, and Autoregressive Distributed Lag (ARDL) methodology the result of the unit root test revealed that Gross Domestic Product growth rate, foreign direct investment and exchange rate were stationary at level, while trade openness, Inflation Rate, and Interest rate are Stationary at first difference. The ARDL estimation, the Bounds Test shows that there is a long run cointegrating relationship between the dependent and independent variables, both in the short run and long run. The ARDL estimations revealed that foreign direct investment, interest rate, and trade openness had a positive and significant impact on the economic growth in Nigeria, while exchange rate and inflation rate impacted negatively and insignificantly on the economic growth in Nigeria during the period under review. The Granger causality test show that unidirectional relationship runs between interest rate and gross domestic product growth rate, while no causality runs between the following variables; exchange rate and GDP growth rate, inflation rate and GDP growth rate, foreign direct investment and GDP growth rate, as well as trade openness and GDP growth rate. In other words, Exchange rate does not Granger Cause GDP, also GDP does not Granger Cause Exchange rate. Based on the findings, the paper recommends the need for the Central Bank of Nigeria and other relevant stakeholders to embark on appropriate monetary policy aimed at addressing the challenges of high inflation rate as such can boost consumers’ purchasing power.