Shifting the paradigm for securing efficient management of exchange rate in Nigeria: A GARCH and BEKK-MGARCH analysis

Abstract

The influence of foreign exchange on all spheres of any economy is germane to determining its extent of development. Most developing countries have been subjected to managing the integrity of the exchange rate arising from their disadvantageous position in world trade. Nigeria is not an exemption either; this is due to its constant interventions in the foreign exchange market from time to time and by the policy of the existing government in power. However, the interventionist policy framework has been more harmful to Naira as the currency depreciates unabatedly. The pertinent question is whether monetary policy should be the only approach to effective exchange rate management or be combined with fiscal and income policies. Irrespective of the policy choice, the aim, target, and instrument must be complementary without unnecessary disruptions midway, as usually experienced in Nigeria. These inconsistencies have come to bear enormously on the country's exchange rate management. Rather than focusing on the impact of exchange rate volatility on industrial development that could warrant foreign exchange inflows, this paper considers industrialization as an approach to effectively managing exchange rates in Nigeria. This analysis employs a univariate GARCH and BEKK-MGARCH model, using high-frequency monthly time series data from 2000 to 2019, to examine the volatility transmission between the foreign exchange market and the industrial sector. The model estimation uses the Conditional Maximum Likelihood Technique (CMLT). It was discovered that industrial development positively influenced the official market exchange rate compared to the parallel market exchange rate, reducing its volatility. The study thus suggests the vigorous pursuit of foreign exchange earnings and usage policy by earning entities, floating Diaspora bonds, enhancing and encouraging remittances and repatriation of illicit financial outflows to enhance industrialization. This will discourage arbitraging, increasing foreign exchange inflows and stabilizing the economy.