Does Exchange Rate Asymmetry and Institutional Quality Drive Capital Flight in Nigeria? Evidence from Non-linear Dynamic Modelling

This study assessed how exchange rate volatility and institutional quality determined capital flight from Nigeria between 1991 and 2023. The research applied a non-linear dynamic ordinary least squares and Toda-Yamamoto causality techniques. Hence, the research showed that exchange rate fluctuations impacts capital flight in the long term for Nigeria. This phenomenon is due to the empirical affirmation that increase in currency depreciation motivates more capital outflow. However, currency appreciation substantially reduces capital flight from Nigeria, since a strong currency encourages more capital retention within the economy. Also, while corruption has an insignificant effect, governance effectiveness and political violence substantially promote more capital flight, implying that weak institutions play significant role in the growth of capital flight from Nigeria. Furthermore, a substantial causal relationship between exchange rate volatility, institutional quality, and capital flight was found. Particularly, while a bidirectional nexus exist between currency depreciation and capital flight, a unidirectional impact from currency appreciation to capital flight was validated. Similarly, a unidirectional causal association exist from corruption and government effectiveness to capital flight in Nigeria. Based on this findings, the study recommended relevant policy measures to mitigate capital flight in Nigeria.