Exchange Rate Volatility and Inflation in Nigeria: An Empirical Investigation (1970-2011)

Abstract

This paper empirically investigates the relationship between exchange rate and inflation in Nigeria using data for the period of 1970 to 2011. Specifically it sought to: analyse the influence of exchange rate volatility on inflation in Nigeria; and to determine the nature and direction of causality between exchange rate and inflation in Nigeria. Employing Ordinary Least Squares (OLS) techniques and  Granger causality tests, the results indicate that Exchange rate (ER) has an insignificant negative influence on Inflation rate (INF). Furthermore, there is no causality between inflation rate(INF) and exchange rate(ER) in Nigeria. The study recommends that, policy makers and relevant monetary authorities should employ measures that will stabilize the exchange rate in order to ensure that the inflation rate is maintained at a reasonably low level.

Keywords: Exchange rate volatility, Inflation, Ordinary Least Square, Causality.