Impact of Institutional Quality on Exchange Rate Volatility in Nigeria

Abstract

The paper empirically investigates the impact of institutional quality on exchange rate volatility in Nigeria. The period of investigation spans 1981 to 2020, using annual data from World Bank, Central Bank of Nigeria, International Country Risk Guide and National Bureau of Statistic. The technique of analyses is based on the Autoregressive Distributed Lag model.
The institutional quality variables used are contact intensive money, revenue source volatility, and political risk. The Autoregressive Distributed Lag model was carried out after accounting for structural break in series and ensuring the stationarity properties of all variables. A long run relationship was found between exchange rate volatility and institutional quality indicators. Specifically, political risk and revenue source volatility were found to have positively related and statistically significant to exchange rate volatility in Nigeria in the long and short run. In the short run, contract intensive money was found to be positively related to exchange rate volatility in Nigeria. This implies that institutional quality is critical in curtailing exchange rate volatility in Nigeria. Hence, concerted effort should be made to ensure Political restructuring, economic diversification and proper exchange rate management in the country.