Impact of Exchange Rate on Inflation in Nigeria: Symmetric and Asymmetric Analyses

Abstract

Inflation is a variable that is of importance to any economy. It can causes distortion in economic planning and development. Due to its key roles in the economy, government needs to consistently put it under checks so as to avoid economic fluctuations. Therefore, this study investigated the aggregated impact of exchange rate as one of the determinants of inflation rate in Nigeria. The study employed Non-Linear ARDL estimation technique to examine the positive and negative impact of exchange rate on inflation rate, using monthly time series data that cover the period of January, 1996 and December, 2020. It was found in the study that expected inflation or lag of inflation has positive impact on inflation in the short-run in Nigeria. It is also found that exchange rate has symmetric impact on inflation rate in the short-run in Nigeria while it has positive impact on food inflation (FINF) and head-line Inflation (HLINF) in the short-run. It is also found in the study that the impact of rainfall on inflation rate is negative in the short-run in Nigeria. Then, the study recommends that the study recommend that authority should put in place exchange rate and price harmonization institution that will ensure that exchange rate pass-through occurs at the time when Naira appreciates and depreciates. This is to control the producers from charging excessive prices, especially when the cost of production has fallen due to appreciation of Naira.