**Abstract**

The study examined the asymmetric relationship between exchange rate volatility and macroeconomic performance in Nigeria covering the period between 1986Q1 and 2019Q4. The Non-linear Generalised Autoregressive Distributive Conditional Heteroscedasticity (GARCH) model was employed. The study was motivated as a result of periodic increase in exchange rate of naira to a dollar and instability of macroeconomic variables in the economy. The presence of Autoregressive Distributive Conditional Heteroscedasticity (ARCH) effect established the use of non-linear GARCH models which showed that volatility was persistent over the period of study. Consequently, the result revealed that exchange rate volatility exhibited a positive relationship with trade balance, industrial output and inflation in the study period. Thus, good news prevailed more over bad news in the foreign exchange market. The study therefore recommended that monetary authorities in Nigeria should regulate exchange rate and macroeconomic variables in order to control the general price level in the economy.

**Keywords:** Exchange rate volatility, non-linear GARCH, trade balance, industrial output, inflation, Nigeria

#### **1. Introduction**

The obligation of every responsible government is to ensure a balance among the different macroeconomic indicators which reveals the health of the economy. However, the major macroeconomic goal of a country is to achieve rapid growth. But persistent volatile exchange rate is a current impediment for successful macroeconomic policies [1] in any country. Consequently, the monetary authority (Central Bank of Nigeria) has engaged in different exchange rate adjustment policies in attaining macroeconomic objective of price stability. Still, all have proved abortive as greater flexibility in exchange rate is more important to attain equilibrium level and curtail shocks associated with transition from one regime to another. Though, the major objective of exchange rate policy in accordance to [2] is to regulate the domestic currency towards maintaining favourable financial balances and overall macroeconomic stability in order to attain sustainable growth. Subsequently, effort has been made over the years to achieve this objective via adoption of several policy options in foreign exchange market, specifically adoption of Structural Adjustment

Programmes (SAP) by developing countries which was initiated by World Bank and International Monetary Fund in 1986. This eventually resulted to instabilities in exchange rates and aggravated inflationary problems.

The [3] clarified the assertion that instabilities in macroeconomic variables cannot increase output, it could harm the economy wherein firms cannot perform effectively in incidence of high inflation. This indicates that the economy cannot grow unless the macroeconomic environment is stabilised. However, since the economy cannot exist in isolation, balance of trade with other countries is another important factor for macroeconomic performance. International trade is said to be sensitive to macroeconomic changes, in that if openness is positively related to growth, inflation which distorts the price of goods ought to be seriously monitored. However, it has been acknowledged that the breakdown of Bretton Woods system in 1973 rendered exchange rate of many countries unstable overtime. This has increased motivation in predicting exchange rate basically because it is an important price that links the world and domestic market for goods and assets. It as well designates competitiveness of a country's exchange rate with the global market. Its uncontrollable cases have brought about currency crisis in the financial market in terms of output and investment which disrupt macroeconomic performance in Nigeria.

Nevertheless, it is appropriate to examine the interaction that exist among volatility of exchange rate and macroeconomic variables (trade balance, industrial output and inflation) due to the role they play in the overall development of the economy. The three macroeconomic variables are selected because of their sensitivity to exchange rate and their determinant of the general price level in the economy. In relation to trade, it could result to trade surplus or trade deficit therefore distorting trade balance [4]. When trade deficit arises, government might find it difficult to finance the deficit which pose a challenge to the economy. In terms of surplus, it inhibits consequences for government revenue and foreign reserves by upsetting the flow of imports and exports [5]. However, inflation has been acknowledged as the major cause of macroeconomic instability [6]. It was observed that whenever there is an increase in inflation, volatility in exchange rate rises but reverses in periods of relative stability. This implies that increase in exchange rate leads to higher inflation, therefore, variations in exchange rate influences inflation which might prevail for a long time in the economy [7]. Lastly, in relation to output, exchange rate volatility can initiate uncertainty among profit maximisation traders, and thus deteriorates trade balance and alter economic growth [8].

In respect to various empirical studies: [9–11], it is inappropriate to liberalise trade in the periods of macroeconomic instabilities especially inflation and exchange rate volatility. In this regards, macroeconomic policies will destruct and bring about loss of consumers' and investors' confidence and in turn impairs trade in such country. In Nigeria, financial authorities have played an essential role in implementing trade policies and different strategies to regulate important macroeconomic variable that relates to exchange rate. Unfortunately, it has witnessed several economic adversities which have all proved to no avail as the major problem is that Nigerian economy is still an import dependent country. Exchange rate which is the most important variable is still on the increase periodically and this is detrimental to macroeconomic performance.

The main objective of this study is to examine the asymmetric relationship between exchange rate volatility and macroeconomic variables in Nigeria. To accomplish this, the article is structured as follows: the next section reviews empirical literature, followed by theoretical review and methodology. Afterwards, the article dwells on data interpretation and then conclusion.
