Can Higher Inflation Lead to Currency Appreciation in Nigeria?

Abstract

This work verified if higher inflation can lead to currency appreciation in Nigeria using an annual data from 1981 to 2013. The ordinary least square (OLS) method was adopted because of its best linear unbiased estimator property. The result showed that current inflation does not lead to currency appreciation in Nigeria, and rather what leads to currency appreciation is expected inflation. Although, monetary policy rate and export were significant in determining Naira value but they did not show the expected signs. The estimated model showed stability and all the explanatory variables used for the analysis accounted for 96% variation in explaining the direction of value of Naira as regards to appreciation or depreciation. The co-integration test showed that a long term relationship existed among the variables and they were stationary at order one I (1).

Keywords: Currency, Inflation, Co-integration and Appreciation