Assessing the Impact of Multiple Exchange Rates on Macroeconomic Stability: Implications for Exchange Rate Unification in Nigeria

Abstract

This study investigates the impact of Nigeria’s multiple exchange rate volatilities on macroeconomic stability, focusing on implications for exchange rate unification. Using GJR-GARCH (1,1) models and a structural VAR (SVAR) framework, we analyze Naira/US$ exchange rates across official, interbank, and bureaux de change markets from January 2010 to December 2022. Results show significant volatility clustering, particularly in the BDC market, where past volatility strongly influences current rates. Depreciation of the Naira leads to short-term volatility increases, which neutralize over time. The SVAR analysis reveals that exchange rate volatility in the BDC market has the most significant impact on inflation and lending rates, while shocks in the official and interbank rates are more predictable with milder long-term effects. The variance decomposition highlights that exchange rate volatility is driven primarily by its own shocks in the short term, with the influence of macroeconomic fundamentals, like real GDP and money supply, growing over time. These findings support the Central Bank of Nigeria’s policy to unify exchange rates, which would reduce discrepancies, improve transparency, and stabilize the forex market. However, long-term stability requires broader reforms to strengthen macroeconomic fundamentals, particularly real GDP growth.