MONETARY POLICY AND EXCHANGE RATE DYNAMICS IN NIGERIA

Abstract

Exchange rate stability remains a central concern for Nigeria’s economic performance, given its 
implications for growth, investment, and external competitiveness. Persistent exchange rate 
volatility has raised questions about the effectiveness of monetary policy in managing 
macroeconomic stability. This study investigates the impact of monetary policy on exchange rate 
dynamics in Nigeria using annual time series data from 1986 to 2023. The analysis applied the 
Autoregressive Distributed Lag (ARDL) framework, and the results showed that money supply 
exerted a positive but insignificant impact on the real exchange rate, while interest rate has positive 
and significant impact. On the other hand, real gross domestic product and credit to private sector 
have negative but significant impact on exchange rate behaviour. Similarly, inflation rate 
negatively impacted exchange rate dynamics but the impact was not significant. These findings 
highlight the crucial role of monetary policy in exchange rate management. The study therefore 
recommends that government authorities should adopt sound monetary policies to promote 
exchange rate stability, while the Central Bank of Nigeria should implement a single-digit interest 
rate regime to lower the cost of capital, encourage private sector investment, and improve the ease 
of doing business.