Global Journal of Economic and Finance Research

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.

External reserves, exchange rate volatility, trade balance, Dynamic Ordinary Least Squares, macroeconomic stability

1. Abila, B., & Kantola, J. (2013). Municipal solid waste management problems in Nigeria: Evolving knowledge management solution. International Journal of Environmental, Chemical, Ecological, Geological and Geophysical Engineering, 7(6), 303–308. 
2. Adeniyi, O., Omisakin, O., & Egwaikhide, F. (2018). Exchange Rate Volatility and Economic Performance in Nigeria: Evidence from a VAR Model. Nigerian Journal of Economic Policy, 25(1), 33–49. 
3. Asher, O. J., & Ogunleye, E. O. (2019). Inflation and Exchange Rate Dynamics in Nigeria. Journal of African Macroeconomic Policy, 6(1), 21–36.
4. Bakare, A. S., & Fawehinmi, F. O. (2022). External Reserves and Exchange Rate Volatility in Nigeria: A Dynamic Analysis. Journal of Economics and Sustainable Development, 13(4), 78–87. 
5. Fapetu O, Oluwole O.O, Olokoyo O.F, Olabisi J & Owoeye S.D (2023) Nigeria foreign exchange rates and its external reserves position: A Reassessment. Fuoye Journal of Accounting and Management 6(1)133-150
6. Frenkel, J. A., & Jovanovic, B. (1981). Optimal International Reserves: A Stochastic Framework. The Economic Journal, Vol. 91, No. 361, pp. 507–514.
7. Heller, R. (1966). Optimal International Reserves. The Economic Journal, Vol. 76, No. 302, pp. 296–311.
8. Heller, R., & Khan, M. (1978). The Demand for International Reserves under Fixed and Floating Exchange Rates. IMF Staff Papers, 25(4), 623–649. https://doi.org/10.2307/3866772.
9. Ikwuagwu, B. and Eze, I. (2019). Effect of Exchange Rate Volatility on Foreign Reserves in Nigeria. INOSR HUMANITIES AND SOCIAL SCIENCES 5(1): 120-139. http://www.inosr.net/inosr-humanities-and-social-sciences/
10. International Monetary Fund (IMF, 2001). Foreign Exchange Reserves. https://www.imf.org/external/np/sta/ir/
11. International Monetary Fund (IMF). (2016). Assessing Reserve Adequacy: Policy Paper. IMF Publications. https://www.imf.org/external/np/pp/eng/2016/021916.pdf. 
12. Nwagu U; Edeh, C; & Onoriode H. (2023). Oil Price Fluctuation and Exchange Rate In Nigeria: Is There A Volatility Transmission Effect? Journal of Advanced Research in Economics and Administrative Sciences. DOI: https://doi.org/10.47631/jareas.v4i4.640
13. Obadan, M. I. (2017). Foreign Exchange Market and the Balance of Payments: Elements, Policies and Nigerian Experience. Benin City: Goldmark Press.
14. Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2010). Financial Stability, the Trilemma, and International Reserves. American Economic Journal: Macroeconomics. 
15. Ocheni, S. I., & Nwankwo, B. C. (2021). Trade Balance and Exchange Rate Dynamics in Nigeria. International Journal of Development Issues, 20(1), 112–125. 
16. Oduh, M. O. (2016). FDI Inflows and Exchange Rate Behaviour in Nigeria. African Economic and Policy Review, 3(2), 59–77.
17. Olayungbo, D. O., & Akinbobola, T. O. (2019). External Reserves and Exchange Rate Volatility in Nigeria: A Structural VAR Approach. Central Bank of Nigeria Economic and Financial Review, 57(2), 49–72. 
18. Shaibu, I., & Izedonmi, F. I. (2020). An Autoregressive Distributed-Lag Modeling Approach to Nigeria’s External Reserves Dynamics. International Journal of Academic Research in Business and Social Sciences, 10(2), 539-557.
19. Soro G. T., Aras O. N.  (2021). the implication of exchange rate volatility on Nigeria’s external reserves: 1980-2020. Journal of Management, Economics, and Industrial Organization, Vol.5 No.2, pp.37-47.
20. World Bank (2019). Managing External Reserves in Low-Income Countries. World Bank