Exchange Rate Volatility, Inflation Rate and Foreign Direct Investment in Nigeria

This study investigated how exchange rate volatility and inflation rates affect foreign direct investment in Nigeria, as well as the causal relationships among these factors from 1986 to 2023. Annual time series data were obtained from the Central Bank of Nigeria and the World Bank. Exchange rate volatility was measured using a five-year rolling standard deviation of the naira–dollar exchange rate. The Vector Error Correction Model (VECM) was employed in obtaining the effects, while the VEC Granger Causality/Block Exogeneity Wald test was used in investigating their causal influences. To allow for residual diagnostics, the short-run equations of the VECM were re-estimated using Ordinary Least Squares (OLS). The result showed exchange rate volatility has a negative effect on the foreign direct investment in the short run but positive effects in the long run, while inflation has a positive effect on exchange rate volatility both in the long run and in the short run. The result further showed that inflation Granger-causes FDI and there is weak evidence that inflation Granger-causes exchange rate volatility (10% test). Based on the findings, the study concluded that monetary authorities should exercise caution in their reliance on these results by identifying the threshold for inflation targeting policies in Nigeria.