Can higher reserves reduce exchange rate volatility in Nigeria? A GARCH-MIDAS approach

This study examines the relationship between external reserves and exchange rate volatility in Nigeria, with data from 2006 to 2022. Using the GARCH-MIDAS approach, we conduct distinct analyses covering the full sample, the period of the Global Financial Crisis (GFC), and the COVID-19 pandemic to explain the dynamics of the relationship between our variables during periods of economic stability and turbulence. Our findings provide strong evidence that higher external reserves can mitigate exchange rate volatility in Nigeria, particularly during periods of economic stress. To enhance exchange rate stability, the study recommends that policymakers should prioritize reserve accumulation, diversify the economy beyond oil, strengthen the Sovereign Wealth Fund, and strategically intervene in the foreign exchange market.