Statistical Analysis of Exchange Rate Volatility and Its Impact on Manufacturing Sector Output in Nigeria

Exchange rate volatility in Nigeria, driven by the structural dependence of the economy on oil revenue and import-heavy manufacturing inputs, has intensified following the 2023 naira float policy, creating significant uncertainty for domestic manufacturers. This study employs the Generalised Autoregressive Conditional Heteroscedasticity model and its variants to measure exchange rate volatility dynamics for the naira-dollar pair using daily data from the Central Bank of Nigeria's FMDQ OTC market spanning January 2020 to December 2023. The GARCH (1,1) model with Student-t error distribution is selected based on likelihood ratio testing and AIC comparison. A structural vector autoregression model is subsequently estimated to examine the dynamic impact of identified exchange rate volatility shocks on manufacturing sector output as measured by the Manufacturing Purchasing Managers Index. Impulse response functions trace the time path of manufacturing output responses to a one-standard-deviation volatility shock. Results indicate that a one-unit increase in GARCH-estimated conditional variance reduces manufacturing output in the following quarter by 3.2 percentage points on average, with the effect persisting for three quarters before dissipating. The study recommends establishment of a formal exchange rate stabilisation framework and local raw material development initiatives to reduce manufacturers' import dependency. Keywords: exchange rate volatility, GARCH model, manufacturing output, Nigeria, SVAR analysis.