Exchange Rate and Inflation Rate Nexus: The Nigerian Experience

Abstract

This study examined the Exchange rate and inflation in Nigeria using annual time series data covering the period 1981-2021. To achieve this objective, the study adopted an ex-post facto research design, used secondary data obtained from the CBN Statistical Bulletin, and specifically employs the Autoregressive Distributive Lag (ARDL) technique to analyze the time series data from the period January 1981 to December 2021 to investigate the relationship between Real Gross Domestic Product, inflation expectation, Money Supply, Fiscal Deficit, Inflation Rate, and Exchange Rate. The study used the Augmented Dickey-Fuller test to determine the presence of a unit root, the Breusch-Godfrey Serial Correlation LM test to know the presence of serial correlation, and ARDL bound test for the co-integration test to establish the relationship among the variables in the study. The results of the stationarity test indicated that the variables have mixed order of integration while the result for co-integration shows that there is a long-run relationship between the variables. Findings showed that Real Gross Domestic Product (RGDP) and exchange rate (EXR) had a positive and significant impact on inflation, meaning that inflation in Nigeria is caused by exchange rate fluctuations as well as an increase in RGDP.  From the Granger Causality test, it was found that Fiscal Deficit, Money Supply, and Real GDP granger cause inflation in Nigeria. Meanwhile, in terms of the ability of inflation to predict the explanatory variables, it was revealed that the exchange rate does not Granger cause the inflation rate. The test of the hypothesis shows that the Exchange rate has a significant impact on inflation in the short run. Based on the findings, the study recommended that the growth of the money supply should be controlled by the central bank to reduce inflation to the barest minimum.

Keywords: Exchange rate, Inflation rate, Bound test, Money Supply

DOI: 10.7176/JESD/14-10-02

Publication date:May 31^st 2023