Exchange Rate Volatility And Inflation Dynamics In Nigeria

Abstract

The study provided analysis of the effect of exchange rate volatility on inflation in Nigeria. The study used quarterly time series secondary data covering the period from 2000Q1 to 2023Q4. The study disaggregated the period into two to assess the extent of volatility for exchange rate during period of broad-based sustained growth (2000Q1- 2014Q4) and period when growth rates decreased (2015Q1-2023Q4) in Nigeria. The study employed statistical and econometrics techniques for data estimation and analysis. The study employed E-GARCH model to assess volatility clustering in exchange rate, generate a series for exchange rate volatility and examine the effect of exchange rate volatility on inflation in Nigeria for the period of the study. The study further employed Granger causality test to establish causal relationship among the variables of the study. The result obtained from E-GARCH model estimates indicated that, both ARCH coefficients and GARCH coefficients captured meaningful relationship between short-term past shocks and current volatility as well as long-term past and current volatility indicating time varying volatility of exchange rate persistence over the two periods studied with the persistence been higher in the period 2015Q1 to 2023Q4. The E-GARCH estimated model further indicated a positive and significant effect of exchange rate volatility on inflation. The period 2000Q1 to 2014Q4 have witnessed improved inflation performance against the period 2015Q1 to 2023Q4 by differential of 20%. The result of the estimated E-GARCH model however showed a mixed relationship for money supply, given that a negative effect of money supply on inflation is attained for the period 2000Q1 to 2014Q4 and a positive effect of money supply on inflation is attained for the period 2015Q1 to 2023Q4. The result obtained from granger causality indicated uni-directional causality from exchange rate (EXR) to inflation (INF), exchange rate (EXR) to money supply (M2) while bi-directional causality between exchange rate volatility (EXRV) and exchange rate (EXR). On the bases of these findings, the study recommended for diversification of the economy to enhance greater integration of the economy into the global market, and government should commit more investment in infrastructure projects.