There is a growing agreement in the literature that prolonged and substantial exchange rate volatility can create severe macroeconomic disequilibria and the correction of external balance will require both exchange rate devaluation and demand management policies. The main intuition behind this is that an increase in exchange rate volatility leads to uncertainty which might have a negative impact on trade flows. Consequent upon the above, this study focused on the effect of exchange rate volatility on balance of payments in Nigeria, 1980 to 2016. Exchange rate volatility was measured using the GARCH approach. The empirical results confirmed that exchange rate is positively related to balance of payments; while real gross domestic, inflation rate and volatility of exchange rate are negatively related to balance of payments. Therefore government should not underplay exchange rate volatility in Nigeria. In addition, government should encourage export promotion strategies in order to maintain a surplus balance of trade which will help make the domestic currency strong and also prevent further depreciation of the Nigeria naira in the future.

exchange rate, volatility and balance, Garch approach