Causes of Exchange Rate Volatility

David Umoru *

Department of Economics, Edo State University Uzairue, Iyamho, Nigeria.

Oghenevwodo Naphtali Akpoviroro

Department of Economics, Edo State University Uzairue, Iyamho, Nigeria.

Solomon Edem Effiong

Department of Economics, Wellspring University, Irhirhi Airport Road, Benin City, Nigeria.

*Author to whom correspondence should be addressed.


This study examined the determinants of exchange rate volatility basing evidence on 7 African countries; Niger, Sudan, Cameron, Equatorial Guinea, Tunisia, Congo, and Cote D’Ivoire from 1990-2023. The study conducted the Autoregressive Distributive Lag (ARDL) bounds testing for co-integration and also estimated the error correction model. Furthermore, ARCH and GARCH models were analyzed to measure the volatility of a time series by fitting an autoregressive model to the squared residuals of the time series. The ARCH and GARCH results suggest the volatility of the exchange rate markets in the aforementioned countries is not random. The speed of adjustment of the volatility in the exchange rate of the Sudanese economy is 39%, in Niger Republic it is 50%, in Cameroon it is 52%, in Tunisia it is 55%, in Congo the speed is 32%, in Equatorial Guinea, the speed of adjustment is 58% and in Côte D’Ivoire the speed is 45%, respectively. The study found that the determinants of exchange rate volatility among African countries vary depending on the specific country. The observed volatility in the Sudanese exchange rate was anchored by the significant positive influence of inflation and income differentials as well as the significant negative influence of interest rate differential. In Niger Republic, exchange rate volatility was driven by the significant positive influence of productivity growth and money supply as well as the significant variation in oil prices and interest rate differentials. The observed short-run volatility in Cameroon's exchange rate was significantly and positively influenced by inflation differential and money supply variation whereas it was significantly but negatively propelled by interest rate differential and oil price shock. In Tunisia, exchange rate volatility was stimulated by the significant positive influence of inflation differential, productivity growth, oil price shock, and the significant negative role played by trade balance. The observed short-run volatility in the Congolese exchange rate was induced by the significant positive impact of inflation differential, income differential, trade balance, variation in money supply, and the significant negative impact of interest rate differential. In Equatorial Guinea, the observed exchange rate volatility was determined based on the significant and positive impact of differential in the inflation rate, oil price shock, changes in the money stock, and the foreign balance of trade. The observed volatility in the Côte D’Ivoire exchange rate was significantly and positively driven by the differentials in inflation rate, interest rate, and income level, the foreign trade balance but significantly stimulated by the negative influence of oil price shock. The general policy advice is that governments of all the countries covered by the study should implement exchange rate controls to limit the volatility of their currency fluctuation by imposing a limit on the amount of foreign currency that can be traded in the country. African governments should monitor the inflation differential between their own country and their trading partners to see if it is becoming too large. If it is, the government might raise interest rates to make its currency more attractive to investors.

Keywords: Exchange rate volatility, inflation differential, interest rate differentials, money supply differentials, income differential

How to Cite

Umoru, D., Akpoviroro, O. N., & Effiong , S. E. (2023). Causes of Exchange Rate Volatility . Asian Journal of Economics, Business and Accounting, 23(20), 26–60.


Download data is not yet available.


Chen Z. The impact of trade and financial expansion on volatility of real exchange rate. PLoS ONE 2022;17(1):e0262230. Available:

Ozturk I. Exchange rate volatility and trade: A literature survey. International Journal of Applied Econometric and Quantitative Studies. 2006;3-1.

Narayan S Roy. Concept of foreign exchange rate; 2021.


Zhang T, Liao G. Currency hedging, exchange rate movement, and dollar swap line usage during Covid-19 pandemic; 2020.

Sussman N, Saadon Y. Nominal Exchange Rate Dynamics And Monetary Policy: Uncovered Interest Rate Parity And Purchasing Power Parity Revisited; 2018.

Dedola L, Georgiadis G, Gräb J, Mehl A. Does a big bazooka matter?. Quantitative easing policies and exchange rates; 2020.

Oaikhenan HE, Aigheyisi OS. Factors explaining exchange rate volatility in Nigeria. Theory and empirical evidence. Economic and Financial Review. 2015;53(2):47-77.

Nawal H, Abbas E, Abdalla EA. Exchange rate volatility in sudan: Does the exchange rate system matter?. Journal of Finance and Bank Management. 2019;7(2):1-24.

Chen J, Gordon S, Suzanne K. Exchange rate: What they are, how they work, why they fluctuate; 2022.


Aigheyisi Oziengbe. Factors explaining exchange rate volatility in Nigeria: Theory and empirical evidence; 2021.


Diebold FX, Husted S, Rush M. Real exchange rates under the gold standard. Journal of Political Economy. 1991;99(6):1252-1271. Available:

Sheikh UA, Asad M, Ahmed Z, et al. Asymmetrical relationship between oil prices, gold prices, exchange rate, and stock prices during global financial crisis 2008: Evidence from Pakistan. Cogent Economics & Finance. 2020;8(1)1757802.

Schreyer P, Koechlin F. Purchasing power parities -measurement and uses statistics brief. OECD. 2002;3.

Kadochnikov D. Gustav cassels purchasing power parity doctrine in the context of his views on international economic policy coordination. European Journal of the History of Economic Thought. 2013;20(6):1101-1121.

Dornbusch R. Expectations and exchange rate dynamics. Journal of Political Economy. 1976;84(6): 1161-76.

MacDonald R, Taylor MP. The monetary model of the exchange rate: Long-run relationships, short-run dynamics and how to beat a random walk. Journal of International Money and Finance. 1994;13(3):276-290.


Gabaix X, Maggiori M. International liquidity and exchange rate dynamics. The Quarterly Journal of Economics. 2015;130(3):1369-1420.

Branson WH, Halttunen H. Asset market determination of exchange rates: Initial empirical and policy results. In Trade and Payments under Flexible Exchange Rates, Martin JP, Smith A, (eds.). 1979;55-85. London: Macmillan.

Nawal Hussein, Abbas Elhussein, Abdalla Elfadil, Idries Ahmed. Exchange rate volatility in sudan: Does the exchange rate system matter?. Journal of Finance and Bank Management. 2019;7(2):1-24.


Ibrahim A, Mohammed B, Sumaya AKA. Impact of monetary policy instruments on exchange rate volatility in Sudan; 2019.

Slyvia D, Okereke EJ. Determinants of exchange rate in African sub-Saharan countries. Saudi Journal of Economics and Finance; 2022. Available:

Ezirim Chinedu B, et al. Capital structure and firm value: Theory and further empirical evidence from Nigeria. International Journal of Business, Accounting and Finance. 2023;11(1):68.

Mpofu TR. The determinants of real exchange rate volatility in South Africa. World Economy; 2020.

Available: 013

Obstfeld M, Rogoff K. Exchange rate dynamics redux. Journal of Political Economy. 1995;103(3).

Han YW. Long memory volatility dependency, temporal aggregation and the Korean currency crisis: The role of a high-frequency Korean won (KRW)–US dollar ($) exchange rate. Japan and the World Economy. 2005;17(1):97-109.


Ajao MG. The determinants of real exchange rate volatility in Nigeria. Ethiopian Journal of Economics. 2015;24(2).

Anejo O, Kalterbrunner A, Ruiz DP. Determinants of the exchange rate, its volatility and currency crash risk in Africa’s low and lower-middle-income countries; 2022.

Bleaney M, Manuela F. Real exchange rate volatility: Is sub-Saharan Africa different?; 2016.

Abdul R, Mohammad B. Empirical determinants of exchange-rate volatility: Evidence from selected Asian economies. Journal of Chinese Economic and Foreign Trade Studies. Emerald Group Publishing Limited. 2021;15(1):63-86.

Shevchuk V, Kopych R. Exchange rate volatility, currency misalignment, and risk of recession in the Central and Eastern European Countries. Risks. 2021;9(5):82. Available:

Bello MK, Olayungbo OD, Folorunso AB. Exchange rate volatility and macroeconomic performance in Nigeria. IntechOpen; 2022. DOI:10.5772/intechopen.100444

Zerrin Kiliçarslan. The relationship between exchange rate volatility and foreign direct investment in Turkey: Toda and yamamoto causality analysis. International Journal of Economics and Financial Issues, Econjournals. 2018;8(4):61-67.

Taylor MP. The economics of exchange rates. Journal of Economic Literature. 1995;33(1):13-47. Available:

Akintunde YW, Oyegoke E, Jelilov G, Haruna T. Determinants of Exchange Rate in Nigeria: A Comparison of the Official and Parallel Market Rates. The Economics and Finance Letters. 2019;6: 178-188.


Cassel G. Abnormal Deviations In International Exchanges. The Economic Journal. 1918;28(112): 413-415.


Krugman Obstfeld. International economics. Pearson Education, inc; 2009.

Nick L, Boyle MJ, Hans DJ. How does the balance of trade affect currency exchange rates; 2022.


Kanu SI, Nwadibu A. Exchange rate volatility and international trade in Nigeria. International Journal of Management Science and Business Administration. 2020;6(5):56-72.

Kruger AO. Exchange rate determinants. Cambridge Press; 1983.

Stancık J. Determinants of exchange rate volatility: The case of the new EU members. Czech Journal of Economics and Finance. 2007;57(9-10):414-432.

Itshoki O, Mukhin D. Exchange rate disconnect in general equilibrium. Journal of Political Economy. 2021;129(8).

Todani KR, Munyama TV. Exchange rate volatility and exports in South Africa, South African Reserve Bank. In TIPS/DPRU Forum. 2005;30. Available:

Mussa M, Masson P, Swoboda A, Jadresic E, Mauro P, Berg A. Exchange rate regimes in an increasingly integrated world economy. IMF Occasional Paper No.193, Washington, DC; 2000.

Wang T. Sources of real exchange rate fluctuations in China. Journal of Comparative Economics. 2005;33(4):753–771. Available:

Abhyankar A, Sarno L, Valente G. Exchange rates and fundamentals: Evidence on the economic value of predictability. Journal of International Economics. 2005;66:325–48.

Ilzetzki E, Reinhart CM, Rogoff KS. Will the secular decline in exchange rate and inflation volatility survive covid-19?. Brookings Papers on Economic Activity, Fall; 2020.

Baumeister C, Kilan L. Forty years of oil price fluctuation: Why the price of oil may still surprise us. Journal of Economics Perspectives. 2016;30(1):139-160.

Richa M. All you need to know about oil shocks and their economic impact; 2022. Available:https://www.thehindubusinessline,com/blexplainer/all-you-need-to-know-about-oil-shocks-and-their-economic-impact/article65223729.ece.

Agya AA, Samuel PA, Amadi KW. Shocks and volatility transmission between oil price and Nigerias exchange rate. SN Bus Econ. 2022;2(6):47. DOI:10.1007/s43546-022-00228-z. Epub 2022 May 10.

PMID: 35573222 PMCID: PMC9085555.

Engle RF. Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica. 1982;50(4):987–1007. Available:

Bollerslev Tim, Diebold Francis, Andersen Torben, Labys P. Modelling and forecasting realized volatility. Econometrica. 2003;71:579-625. DOI:10.2139/ssrn.267792.

Reinhart CM, Rogoff KS. The modern history of exchange rate arrangements: A reinterpretation. International Monetary Fund Working Paper. 2002;1–10.

Ezirim CB, Edith AzukaAmuzie, Michael I. Muoghalu . Autoregressive distributed lag analysis of interdependencies between inflation and exchange rates in Sub-Saharan Nigeria. The IABPAD Conference Proceedings Dallas, Texas. 2012;9(2):1082-1093.

Shangufta. Exchange rates and inflation rates. Exploring nonlinear relationships. Review of Economics & Finance. Academic Research Centre of Canada. 2011;1-16.

Frankel JA, Rose AK. A survey of empirical research on nominal exchange rates. Center for International and Development Economics Research (CIDER) Working Papers 233409, University of California-Berkeley, Department of Economics; 1995. DOI:10.22004/ag.econ.233409

Menkhoff L, Rebitzky RR. Investor sentiment in the US-dollar: longer-term, non-linear orientation on PPP. Journal of Empirical Finance. 2008;15:455–67.

Rodrik Dani. The real exchange rate and economic growth. Brookings Papers on Economic Activity. 2008;365-412. DOI:10.1353/eca.0.0020.

Eichengreen B. When to dollarize. Journal of Money, Credit and Banking. 2002; 34(1):1–24. Available:

Meese RA, Rogoff K. Empirical exchange rate models of the seventies: Do they fit out of sample?. Journal of International Economics. 1983;14(1–2):3-24.


Evans MD, Lyons RK. Meese-Rogoff redux: Micro-based exchange-rate forecasting. American Economic Review. 2005 May 1;95(2):405-14.

Hau H, Rey H. Exchange rates, equity prices, and capital flows. The Review of Financial Studies. 2006;19(1):273-317. Available:

Bergin PR, Glick R. Endogenous nontradability and macroeconomic implications. NBER Working Papers. 2003;9739.

Bahmani-Oskooee M, Goswami GG. Exchange rate sensitivity of Japans bilateral trade flows. Japan World Economics. 2004;16:1-15.

Bacchetta P, Wincoop EV. Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?. American Economic Review. 2006;96(3):552-576. DOI:10.1257/aer.96.3.552.

MacDonald R, Taylor MP. Reexamining the monetary approach to the exchange rate: The dollar-franc, 1976–1990. Applied Financial Economics. 1994b;4(6):423–429.

Dumas B. Dynamic equilibrium and the real exchange rate in a spatially separated world. The Review of Financial Studies. 1992;5(2):153-180. Available:

Bacchetta P, Wincoop EV. Does exchange-rate stability increase trade and welfare?. American Economic Review. 2000;90(5):1093-1109. DOI:10.1257/aer.90.5.1093,

Isard P, Faruqee H. Exchange rate assessment: Extension of the macroeconomic balance approach. Occasional paper 167, International Monetary Fund; 1998.

Andersen TG, Bollerslev T, Diebold FX, Labys P. The distribution of realized exchange rate volatility. Journal of the American statistical association. 2001;96(453):42-55.

Hsieh D. Modeling heteroskedasticity in daily foreign exchange rates. Journal of Business and Economic Statistics. 1989;7:307-317.

Cheung Yin-Wong, Chinn MD. Currency traders and exchange rate dynamics: A survey of the US market. Journal of International Money and Finance. 2001;20(4):439-471. Available:

Engel Charles M, West Kenneth D. Exchange rates and fundamentals; 2004. NBER Working Paper No. w10723.

Available: 589008/