Exchange Rate and Inflation in Nigeria: A Non Linear Approach (1992Q1 – 2024Q4)

Lukman Lawali; Bashir Umar Faruk; Namadina Hamza; Bashir Bello

doi:10.59890/ijaeam.v3i6.98

Authors

Lukman Lawali Zamfara State University Talata Mafara
Bashir Umar Faruk Federal University Gusau
Namadina Hamza Federal University Gusau
Bashir Bello Federal University Gusau

DOI:

https://doi.org/10.59890/ijaeam.v3i6.98

Keywords:

NARDL, Exchange Rate, Inflation, Low of One Price, Purchasing Power Parity Nigeria

Abstract

This study employs the Nonlinear Autoregressive Distributed Lag (NARDL) methodology to examine how asymmetric exchange rate variations influence inflation in Nigeria, covering the period from early 1992Q1 to late 2024Q4. The theoretical framework draws from purchasing power parity (PPP) and the law of one price (LOP) principles. The research aimed to analyze both immediate and extended temporal relationships between inflation and exchange rate movements, alongside other economic indicators. Using bounds testing for co integration, the study established a sustained equilibrium relationship among the examined variables. Results reveal that exchange rate fluctuations both strengthening and weakening demonstrate minimal and statistically insignificant positive effects on inflation across both timeframes, suggesting no asymmetric relationship exists. Additionally, the analysis shows that crude oil prices, monetary supply, and lending rates maintain significant inverse relationships with inflation over extended periods, while GDP exhibits significant negative correlations with price levels. Import levels display an insignificant positive correlation with inflation and demonstrate no substantial impact throughout the observation period. Given these outcomes, the research recommends that Nigerian monetary policymakers adopt an integrated strategy emphasizing exchange rate steadiness, careful monetary supply control, and structural economic transformations to enhance local production capacity. A comprehensive approach combining inflation management and macroeconomic stability measures would facilitate sustainable outcomes

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