Determinants of Exchange Rate Instability in a Developing Economy : Conceptual Issues and Further Evidence from Nigeria (1970-2005)

This study examines the determinants of exchange rate instability (volatility of Real Exchange Rate) in a developing economy. The cardinal focus is to ascertain the determinants of exchange rate volatility (instability) in a developing economy with particular reference to Nigeria as well as assess the implications of volatility of real exchange rate on selected macroeconomic variables. The study used ordinary least square (OLS) technique in relation to time series data on exchange rate instability (VRER), current account balance (CABY), import (IMPY), External Reserves (EXTRESS), inflation and economic growth (GDP). Instability of exchange rate is measured by three years moving average of standard deviation of real exchange rate. This paper advocates that besides the basic macroeconomic variables which are acknowledged as determinants of exchange rate instability a realistic exchange rate capable of accelerating economic growth, reducing import and also stemming the tide of inflation are paramount in a developing economy and should be maintained. Equally, carefully handling unbridled exchange rate in an import dependent economy which is capable of inducing price escalation is a sine qua non in the economy