Impact Of Naira Exchange Rate Volatility On Inflation Dynamics In Nigeria: An ARCH-Garch Approach

Abstract

Unstable exchange rates and inflation can harm the economy of Nigeria; the ongoing increase in prices has made investors lose confidence in future money management plans. If inflation remains unstable for a long time and there is less investment, prices could become unbalanced in the future. As a result of this problem, this paper looks at how the naira’s volatility relate to inflation, the study aims to find out which economic factors affect how much the exchange rate goes up and down in Nigeria, and also to examine the relationship between changes in currency value and rising prices in Nigeria. This study uses the GARCH model and the Vector Error Correction Model (VECM) as its main methods. The study used yearly data from the Central Bank of Nigeria and the National Bureau of Statistics from 1986 - 2023. The results from the VECM showed that the money supply (MS) and the nominal exchange rate (NER) had a positive and important impact on the inflation rate in Nigeria during the time studied. This finding means that increasing the amount of money in Nigeria can lead to higher prices, or inflation. The study thus recommends that the Central Bank should control how much money is available in the economy. This is because when there is more money available, it usually causes prices to go up (inflation). To keep inflation in check, the CBN needs to keep an eye on how much money is in circulation.