INSTITUTIONAL QUALITY AND EXCHANGE RATE VOLATILITY IN NIGERIA: A CAUSALITY IMPLICATION

Abstract

The problem of exchange rate volatility has become pronounced in Nigeria. The role of institutional quality seems to be a major cause of this ominous predicament. This study employed the Toda-Yamamoto causality framework to examine the causal link between institutional quality and volatility of the exchange rate in Nigeria for the period 1981- 2020, using data from secondary sources. The result shows a unidirectional causality from revenue source volatility to exchange rate volatility, while a bi-directional causality was found between exchange rate volatility and political risk as well as between exchange rate volatility and revenue source volatility. This suggests that political risk and revenue source volatility are important institutional variables that enhance exchange rate volatility in Nigeria. The study concludes that political risk and revenue source volatility pose significant threats to exchange rate management in Nigeria. The study recommends an overhaul of the political space and revenue diversification if exchange rate volatility is to be curtailed.