Impact of Exchange Rate Variation and Inflation on the Economic Growth of Nigeria: An Empirical Approach.

Abstract

The essence of this study is to empirically examine the impact of exchange rate variation and inflation on the economic growth of Nigeria. Ordinary Least Square method was adopted to analyze the time series properties of  the variables under consideration so as to determine the trend of the variations using annual  data set on real GDP and inflation rate spanning from 1980–2010. The objective of this study among others is to examine the effect of exchange rate variation and inflation on the economic growth of Nigeria. The data sources were mainly from a twenty three year financial indications of exchange rate variations and inflation. The data sources were mainly from CBN Statistical Bulletin (various issues), CBN Annual Report (various issues), International Monetary Fund and International Financial Statistics Year Book (various issues). The interest rate variations were measured by three years moving average of standard deviation of the nominal exchange rate. The empirical analysis revealed that export and import showed a positive relationship but not statistically significant at 3.4%.The coefficient of Exchange rate showed a positive relationship but is statistically significant at 3.4%. This implies a positive relationship between inflation and exchange rate. This is because an increase in the volatility of exchange rate will lead to increase in inflation. Only economic growth recorded a negative relationship. The study contends that while high rate of inflation and inconsistent exchange rates is detrimental to economic growth, moderate and stable inflation rate supplements returns to savers, enhances investment and therefore economic growth of a country.  Base on strength of our findings, the researcher submits that macroeconomic policies aimed at enhancing sustainable economic development should not over concentrate at fighting inflation but should on other area of economic development such as factor input productivity and  human capital development.

Keyword: Exchange Rate, Economic Growth, inflation rate, Exchange Rate Variation, Import, Export.