Asymmetric Effect of Exchange Rate Volatility on Foreign Direct Investment, Inflation and Balance of Trade in Nigeria

Abstract

This research empirically investigated asymmetric effect for volatility of currency rate exchange on foreign direct investment, inflation and Balance of Trade in Nigeria. Quarterly data on the volatility of currency rate exchange, foreign direct investment and inflation (proxied by CPI) and balance of trade as the dependent variables from 1995 to 2022 are derived through the Central Bank Nigeria (CBN) statistical bulletin, Nonlinear Autoregressive Distributed Lag (NARDL) modelling pattern as technique of analysis. Findings from the empirical analysis indicated that the asymmetric effect showed upward swings in exchange rate volatility have a positive but insignificant impact on FDI in the long run. This volatility of currency rate exchange indicated that the asymmetric effects are not present with FDI on the long run. Also, there was upward swing (depreciation) in the volatility of currency rate exchange, revealing a significantly positive impactful consequence on inflation in between long run and short run respectively, while downward spikes (appreciation) in the volatility of currency rate exchange revealed a negatively and significantly impactful consequence on inflation in both short and the long run. Thus, there was no asymmetric effective impact for the volatility of currency rate exchange with inflationary trend. This study recommends that the sustainable attractiveness for more foreign direct investment and a stable inflation rate, despite there being economic volatility; the government should improve ease of doing business and enhance investment in security architecture. This would further boost foreign direct investment, reduce the high inflation, improve and stabilize macroeconomic parameters (balance of trade, exchange rate) in Nigerian economy.