Exchange Rate Volatility And External Shocks Nexus

This study investigates the relationship between exchange rate volatility and external shocks in Nigeria, with a focus on the country’s vulnerability to global economic fluctuations. Using data from the Central Bank of Nigeria's statistical bulletin January 2009 to May 2024, the research employs a Vector Autoregression model to analyze the dynamic interactions between exchange rate volatility (EXV) and key external factors, including oil prices, Foreign Direct Investment (FDI), trade balances, and global uncertainty. The findings reveal that oil prices and trade balance shocks have significant immediate effects on exchange rates, while FDI shows sensitivity to oil price fluctuations, underscoring the reliance of foreign investment on Nigeria’s oil-dependent economy. The Global Uncertainty Index (GUI) demonstrates a self-reinforcing effect, with initial shocks to global uncertainty further exacerbating economic instability, although this effect diminishes over time as markets adjust. Policy recommendations include diversifying Nigeria's economy to reduce dependence on oil revenues, strengthening exchange rate management to mitigate the effects of trade imbalances, and implementing measures to stabilize FDI inflows by reducing exposure to oil price volatility. Additionally, policymakers should enhance their capacity to monitor and manage global uncertainty shocks by building economic resilience and fostering stronger ties with international partners to buffer against external fluctuations. These strategies can enhance macroeconomic stability and reduce Nigeria’s vulnerability to external shocks.