Exchange Rate Volatility and Import Substitution in Nigeria: A Sectoral Analysis

ABSTRACT: The study attempts to estimate the impact of exchange rate volatility on import substitution inNigeria. The study established that the volatility in exchange rate has a detrimental effect in the agriculturalsector in the short run, but normalizes in the long run, thus having a positive permanent effect. Similarly, theempirical results depict that the demand for the consumer goods sector was negatively affected by exchangerate shocks in the initial stage, but over the periods had a positive effect. The result of the food sector, however,conforms with the apriori expectation that currency exchange rates have a significant impact on food prices.Food prices are likely to respond as the Naira weakens or strengthens vis a visother currency.The studyprovides empirical evidence to drive policy formulation in the management of exchange rate as it impacts ontrade of goods and services andprovides information that may guide more studies on the subject.

Keywords: Exchange rate volatility; Import substitution; Agricultural sector; GARCH; Vector autoregression