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Exchange Rate Volatilty and Inflation in Nigeriadocx

By Dr. Adofu Ilemona  et al

Summary

This study assessed the impacts of Exchange Rate Volatility on Inflationary Rate in Nigeria from 1986 to 2016. Secondary data sourced from CBN Statistical Bulletin 2015 was used in this study. The Autoregressive Conditional Heteroskedasticity (ARCH) was developed and applied by the authors where the following macroeconomic variables were used: Exchange Rate (EXR), Inflation Rate (INFR), Broad Money Supply (BMS) and Interest Rate. The ARDL Bound Test was used to assess the long-run relationship between exchange rate volatility and inflation in Nigeria and more so the study employed granger casualty test to identify the causality between exchange rate volatility and inflation in Nigeria. It was however; found out that exchange rate volatility has a negative relationship with inflation. The effect of exchange rate on inflation is very weak and low. Interest rate and Broad money supply also have negative effect on inflation rate in Nigeria, while GDP has a positive effect on inflationary rate in Nigeria. In the same vein the co-integration test shows that, there’s a long run relationship between inflation and exchange rate volatility in Nigeria and finally the granger casualty test shows a unidirectional casualty between the two variables inflation and exchange rate volatility, it shows that inflation causes exchange rate and not otherwise. Hence it was recommended that: The government should take a bold step to ensure exchange rate stability so that investors can have confidence in our financial system and the government as a matter of urgency should also diversify the economy in order to boost productivity, revive every sector of the economy that is not so that normalcy and price stability can be achieved in our economy.
Exchange Rate Volatilty and Inflation in Nigeriadocx
 
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Published: February 7, 2018

Uploaded by: Dr. Adofu Ilemona

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Abstract

This study assessed the impacts of Exchange Rate Volatility on Inflationary Rate in Nigeria from 1986 to 2016. Secondary data sourced from CBN Statistical Bulletin 2015 was used in this study. The Autoregressive Conditional Heteroskedasticity (ARCH) was developed and applied by the authors where the following macroeconomic variables were used: Exchange Rate (EXR), Inflation Rate (INFR), Broad Money Supply (BMS) and Interest Rate. The ARDL Bound Test was used to assess the long-run relationship between exchange rate volatility and inflation in Nigeria and more so the study employed granger casualty test to identify the causality between exchange rate volatility and inflation in Nigeria. It was however; found out that exchange rate volatility has a negative relationship with inflation. The effect of exchange rate on inflation is very weak and low. Interest rate and Broad money supply also have negative effect on inflation rate in Nigeria, while GDP has a positive effect on inflationary rate in Nigeria. In the same vein the co-integration test shows that, there’s a long run relationship between inflation and exchange rate volatility in Nigeria and finally the granger casualty test shows a unidirectional casualty between the two variables inflation and exchange rate volatility, it shows that inflation causes exchange rate and not otherwise. Hence it was recommended that: The government should take a bold step to ensure exchange rate stability so that investors can have confidence in our financial system and the government as a matter of urgency should also diversify the economy in order to boost productivity, revive every sector of the economy that is not so that normalcy and price stability can be achieved in our economy.

About the Authors

Dr. Adofu Ilemona

Dr. Adofu Ilemona

Shaibu Ibrahim

Shaibu Ibrahim

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