Volatility in Capital inflows and Exchange Rate Uncertainty in Nigeria. A Threshold GARCH Approach

Abstract

Volatility in capital inflows creates immense challenges for monetary authority in the management of monetary aggregates and equally induced uncertainty in the foreign exchange market. The authors examined the relationship between capital inflows volatility and exchange rate uncertainty in Nigeria for the period 2008M1 to 2021M12. They employed a multivariate threshold GARCH
(TGARCH) approach. The mean equation result of the study showed that a unit change in capital inflows has no significant effect on exchange rate in Nigeria. The variance equation indicated that volatility of capital inflows does not induce uncertainty in exchange rate in Nigeria and external shocks from inflation rate negatively and significantly influence exchange rate uncertainty. The study
concluded that the results obtain showed that the relationship between capital inflows volatility and exchange rate uncertainty yields good news and this positive shock dies quickly. Thus, the authors recommended that the government should focus on maintaining price stability through appropriate macroeconomic (fiscal and monetary) policies rather than engaging on shooting capital inflows for exchange rate uncertainties.