Exchange Rate Volatility and the Effectiveness of Monetary Policy in Nigeria: An Empirical Analysis (2010-2026)

Authors: Beauty Okuboere Niyekpemi

Affiliation: Department of Economics, Niger Delta University, Faculty of Social Sciences, Wilberforce Island, Bayelsa State

Corresponding Author: [email protected]

January 31, 2026

SIAR-Global Journal of Economics, Finance & Accounting

DOI: 10.5281/zenodo.18441178

Exchange Rate Volatility and the Effectiveness of Monetary Policy in Nigeria: An Empirical Analysis (2010-2026)
Research Article Management

Abstract

The persistence volatility of the Nigerian naira currency value poses a significant challenge to the capacity of the Central Bank of Nigeria (CBN) to fulfill its fundamental mandate, namely price stability and core macroeconomic stability. This research examines the effectiveness of monetary policy in Nigeria from 2010Q1 and 2026Q1 in the presence of exchange rate volatility. The studies use a Vector Autoregression (VAR) model to examine the dynamic interdependence of the following variables: monetary policy rate (MPR), exchange rate volatility (estimated using a GARCH (1,1)) model, inflation rate (INF), and industrial production index (IPI) as an output proxy. The results show that exchange rate volatility undermines the conduction of monetary policy in Nigeria. Precisely, jolts to exchange rates volatility generates long-term inflationary strains and impedes the ability of CBN to boost real economy output using interest rate changes. The variance decomposition analysis also indicates that the exchange rate volatility contributes a significant amount of the forecast error variance of the inflation as well as output, which is higher than the direct contribution of the monetary policy rate itself in later periods. The research finds that, when exchange rate fluctuations are high and unpredictable, the traditional monetary policy interest rate mechanism loses its strength, since the driving force of price and output formation in the country is made up of import-based inflation and capital flow uncertainty. Some suggestions are put forward, such as the fact that the CBN should focus on exchange rate stability by having a coherent and transparent foreign exchange management system, increasing the utilization of complementary macro-prudential instruments, and strengthening the domestic financial market to enhance policy resilience.  

Keywords

Exchange rate Volatility, Monetary policy effectiveness, Vector autoregression, Inflation, Central bank of Nigeria

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How to Cite

Beauty Okuboere Niyekpemi (2026). Exchange Rate Volatility and the Effectiveness of Monetary Policy in Nigeria: An Empirical Analysis (2010-2026). SIAR-Global Journal of Economics, Finance & Accounting, Vol. 1, No. 2. DOI: 10.5281/zenodo.18441178

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Article Information

  • Type: Research Article
  • Journal: SIAR-Global Journal of Economics, Finance & Accounting
  • Subject Area: Management
  • Published: January 31, 2026
  • Volume: 1
  • Issue: 2
  • Word Count: Not specified
  • DOI: 10.5281/zenodo.18441178
  • Processing Fee: $35.00 USD

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