Effect of Exchange Rate Movement on Inflation in Nigeria
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Date
2024-12
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Lead City University, Ibadan
Abstract
This study investigates symmetric and asymmetric of exchange rate on inflation in Nigeria over the period of period 1986-2022. The study also examines the response of
inflation in Nigeria to shocks in exchange rate, The results of unit root tests indicate the existence of both stationary and non-stationary variables which made adoption of
Bounds cointegration test plausible as well as the Autoregressive Distributed Lag (ARDL) model and Nonlinear Autoregressive Distributed Lag(NARDL) methodologies applicable. The result of the first model which explains the effect of exchange rate on inflation in Nigeria showed that in the short run,exchange rate, GDP/Capita, interest rate, import price and money supply have significant effect on inflation. While exchange rate, money supply and GDP per capita negatively affect inflation in the short run, import price exerts a positive influence on inflation. In the long run, exchange rate, GDP per capita, import prices and interest rate do not significantly affect inflation in the long run. For the second model which explains the non-linear effect of exchange rate on inflation, it is evident that asymmetries exist in the relationship between exchange rate and inflation. Exchange rate increase has a positive effect on inflation, while a decrease in exchange rate has a reducing effect on inflation. Money supply and interest rate also has a negative effect on inflation. Import prices and GDP per capita also have positive relationships with inflation in the short run. For the long run estimates, a positive increase in exchange rate has a positive effect on inflation and a negative exchange rate has a negative effect on inflation. GDP per capita, import prices and interest rate have positive effects on inflation, while money supply has a negative effect on inflation.Unanticipated shocks from exchange rate to inflation are also seen to be temporary as they are mean reverting. Finally, by policy recommendation, government should therefore adopt domestic policies that promote price stability.
Keywords: Exchange Rate, Inflation, Asymmetries, Money Supply, Interest Rate
Word Count: 315
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Keywords
Exchange Rate, Inflation, Asymmetries, Money Supply, Interest Rate
Citation
Kate Turabia