Exchange Rate Pass-Through And Macroeconomic Drivers In Nigeria: Evidence From ARDL Analysis, 1986–2023

Abstract

This study examines the determinants of Nigeria’s exchange-rate dynamics through the lens of the Exchange Rate Pass-Through (ERPT) theory. Using annual data from 1986 to 2023 sourced from the Central Bank of Nigeria and the National Bureau of Statistics, an autoregressive distributed lag (ARDL) framework is applied to capture both short- and long-run effects of key macroeconomic drivers: money supply, monetary policy rate, inflation, government capital expenditure, government recurrent expenditure, and real gross domestic product on exchange rates. The long-run results reveal that inflation and money supply exert statistically significant negative impacts on the exchange rate, implying that episodes of rising domestic prices and monetary expansion, when accompanied by credible policy tightening and real-sector growth, are associated with a mild appreciation of the naira. By contrast, the monetary policy rate shows a strong positive impact, indicating that sustained interest-rate hikes may signal fiscal or liquidity risks, thereby encouraging depreciation. Government capital and recurrent expenditures both contribute significantly to naira depreciation, with the recurrent component displaying the stronger impact, while real GDP growth remains positive but statistically insignificant once monetary and fiscal influences are controlled. Based on the findings, this study recommends that effective management of recurrent spending, targeted monetary expansion that supports productive sectors, and transparent policy communication are essential to moderating pass-through pressures and sustaining long term exchange-rate stability.