Exchange rate fluctuations and manufacturing sector performance

The study examines the causal linkages between exchange rate fluctuations and manufacturing sector performance in Nigeria using quarterly series from 1986Q1 to 2016Q4. It adopted the Toda-Yamammoto (T-Y) variant of vector autoregressive (VAR) model to test for causality and responses of the manufacturing sector to shocks in exchange rate. It was found that there was no causality between exchange and manufacturing sector performance in Nigeria. However the study shows that manufacturing sector’s response to shocks in exchange rate (depreciation) in Nigeria follows the pattern of J-curve having negative effect in the short-run but it improves over time. This is corroborated by the decomposition result indicating that exchange rate has more influence on the manufacturing sector in the long-run than in it has on it in the short-run. It is therefore recommended that exchange rate should be devaluated and made readily available only to manufacturers whose inputs are majorly imported and there is no local substitute for their inputs while it should be regulated to other users of foreign exchange.