Noble International Journal of Economics and Financial Research ISSN(e): 2519-9730 Vol. 02, No. 06, pp: 88-97, 2017 Published by Noble Academic Publisher URL: http://napublisher.org/?ic=journals&id=2 Open Access 88 Modeling Exchange Rate Volatility and Economic Growth in Nigeria Nsofor Ebele Sabina a , Takon Samuel Manyo b , Ugwuegbe Sebastine Ugochukwu c* a,c* Department of Banking and Finance Caritas University Emene Enugu b Department of Banking and Finance University of Calabar Abstract: The study investigated exchange rate volatility in Nigeria and its effect on economic growth. The date employed in this study comprised of Exchange Rate, Gross Domestic Product, Government Expenditure, External Reserve, and Foreign Direct Investment which was generated from the Central Bank of Nigeria Statistical Bulletin covering the period of 1981-2015. The study employed GARCH (1,1) model in estimating the volatility of exchange rate in Nigeria and found persistence volatility in naira exchange rate with that of US Dollars. The study also employed the Generalized Method of Moments (GMM) in estimating the impact of volatility and economic growth in Nigeria and the result showed that volatility and FDI has negative and significant impact on the growth of the Nigerian economy. Government Expenditure and External Reserve has positive and significant impact on the growth of the Nigerian economy for the period under study. The study recommended that government and monetary authorities should design policies that will stabilize the persistence volatility in naira exchange rate as well as implement laudable economic policies that will help stimulate the domestic economy. The need to stimulate the interest of Nigerians in patronizing domestic products and services as against the current preference for imported products is hereby emphasized. Keywords: Exchange Rate Volatility, Generalized Method of Moments, Generalized Autoregressive Condition Heteroskedasticity, External Reserve, FDI and Government Expenditure. 1. Introduction Following the balance of payment deficit experienced by America in 1971 and 1973 respectively resulting to the devaluation of dollar, the collapse of Bretton Woods system, a shift from fixed exchange rate to floating exchange rate system, and later to other forms of managed exchange rate system surfaced. Since then, there has been serious argument by scholars on the impact of exchange rate volatility on trade (Anyanwaokoro, 1999). The choice of exchange rate regime can affect economic growth through its effects on macroeconomic economic variables which are important determinants of growth. Factors such as export, international trade, capital flows are highly affected by the variation of exchange rate. As postulated by balance of payment theory, the exchange rate of the currency of a country depends on its balance of payment position. This is because the demand and supply of foreign exchange is from the debit and credit items in the balance of payments respectively representing what comes into the country (imports) and what goes out(export) of a country. If the demand of foreign exchange is higher than its supply, the price of foreign currency will go up and if the demand of foreign exchange is lesser than its supply, the price of foreign exchange will decline. That is to say, adverse balance of payments leads to exchange rate fluctuation while the favorable balance of payment arising from increase in export over import restores equilibrium rate of exchange (Kanamori and Zhao, 2006). The exchange rate of a country‟s currency is the value of its money for international trade in goods, services and finance and, therefore, very important in determining the financial competitiveness and economic balance of a country among the major currencies of the world. Virtually, all countries of the world have witnessed currency volatility which can arise from market forces or from the Central Bank in various forms sequel to the adoption of various exchange rate regimes like; floating, dirty float, managed, dirty managed, pegged, and fixed, all of which depends on the monetary authorities and the economic goals. Central Bank being the monetary authorities has been given autonomous powers under the relevant