External Reserves and Exchange Rate Volatility in Nigeria

ABSTRACT: The study examined the role of external reserves in mitigating exchange rate volatility in Nigeria from 1990 to 2023, alongside other key macroeconomic variables—foreign direct investment (FDI), inflation, and trade balance. Annual time-series data from the Central Bank of Nigeria and the World Bank were used, and the Dynamic Ordinary Least Squares (DOLS) technique was employed to estimate long-run relationships. The findings revealed that external reserves had a positive and significant effect on exchange rate stability, while inflation and trade balance negatively and significantly influenced volatility. FDI, however, showed an insignificant long-run impact. The study concluded that prudent management of external reserves, coupled with policies to improve trade balance and control inflation, was vital for exchange rate stability and macroeconomic resilience.