Effect of exchange rate on inflation in Nigeria

Previous studies on inflation determinants in Nigeria present mixed findings. For instance, Ilemona and Ibrahim (2017) and Inam (2015) report that the exchange rate and money supply exert a negative and insignificant influence on inflation. Conversely, Nuhu (2021) finds these same variables to have a positive and significant impact. Building on these divergent results, this study examines the impact of exchange rate, money supply, interest rate, and government expenditure on Nigeria’s inflation rate, utilising annual secondary data from 1995 to 2024. The ARDL model and the ECM were employed to capture both short-term and long-term dynamics among the variables. Findings reveal that the Exchange Rate significantly and positively affects Inflation at the first lag, while at the second lag, its effect remains positive but insignificant. In the long run, however, the Exchange Rate shows a negative, insignificant relationship with inflation. Government Expenditure and Money Supply both show positive and significant long-term effects on inflation, whereas Interest Rates display a negative but insignificant impact. The ARDL bounds test confirms the existence of a long-run equilibrium relationship among the variables under study. The study recommends that policymakers strengthen their understanding of exchange rate transmission mechanisms. The Central Bank of Nigeria should adopt measures to control money supply growth, while the government should streamline public sector spending to ease inflationary pressures.