The Impact of Exchange Rates on Inflation in Nigeria (1981-2015)

Abstract

This study examines the impact of exchange rate on inflation in Nigeria over the period of 1981-2015. Secondary data were collected from the CBN statistical Bulletin World Bank Data File and those of the Federal Bureau of Statistics in order to establish the relationship between the dependent variable (inflation rate) and the independent variables (exchange rate, Non-oil export, and money supply). The research adopted the Vector Error Correction Mechanism (VECM) and the results of the analysis show that that the fluctuating exchange rate has significantly impacted on the persistence inflation that the country has witnessed. As high exchange rate has led to imported inflation as such the monetary authority in their quest to curb inflation should not totally rely on this instrument to control inflation, but should use it to complement other macro-economic policies. The research recommends that efforts should be intensified to increase the volume of non-oil export to make up for the extra demand for foreign exchange that may be created by the depreciation of Naira.