Dynamic Relationships Between Exchange Rate Volatility, Inflation, and Foreign Direct Investment in Nigeria.

This study examines the dynamic relationship between exchange rate volatility, inflation rate, and foreign direct investment (FDI) in Nigeria from 1986 to 2023. The period captures the post-Structural Adjustment Programme era and subsequent macroeconomic reforms. Annual time series data were obtained from the Central Bank of Nigeria and 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 after establishing cointegration among the variables using the Johansen procedure. To allow for residual diagnostics, the short-run equations of the VECM were re-estimated using Ordinary Least Squares (OLS). The results reveal the existence of a significant long-run relationship among exchange rate volatility, inflation, and FDI in Nigeria. Exchange rate volatility was found to exert a positive impact on FDI inflows in the long run, while inflation exerted a positive and significant effect in both the short and long run. Although short-run responses to volatility were weak, the persistent positive association suggests that investor decisions in Nigeria are shaped more by sector-specific profit opportunities than by conventional macroeconomic risk. The study underscores the need for credible macroeconomic management, particularly transparent exchange rate policies and predictable inflation control, to sustain investor confidence and enhance Nigeria’s investment climate.