The impact of monetary policy on exchange rate dynamics in Nigeria: ARDL Bound Testing Approach
DOI:
https://doi.org/10.65453/ijar.v11i1.1427Keywords:
Monetary Policy, Exchange Rate Dynamics, ARDL, International Trade, Nigeria.Abstract
Using monthly data from 2012 to 2025, this study examines the impact of monetary policy on Nigerian exchange rate dynamics and international trade. The Autoregressive Distributed Lag (ARDL) Bound Testing Approach is used in the study to determine long-run relationships, while Vector Autoregression (VAR) tools, such as impulse response and variance decomposition, are used for dynamic analysis. The findings show that monetary policy rates and inflation have statistically insignificant effects on exchange rate movements, whereas the All Share Index (LASI) has a significant impact on exchange rate dynamics. The ARDL bounds test reveals no long-run co-integration among the variables, implying that monetary policy has limited ability to stabilize the exchange rate. The findings imply that financial market performance and structural factors have a greater influence on exchange rate behavior and international trade outcomes. According to the study, Nigeria's monetary policy framework should be strengthened by strong financial market development, policy consistency, and economic diversification in order to improve its effectiveness in managing exchange rate volatility.
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