Analyzing Exchange Rates and Inflation in Nigeria with ARDL Models

Abstract

Changes in foreign exchange rates and rising costs for products and services are the main causes of fluctuations in economic development. Despite numerous attempts by the government to reduce inflation in Nigeria, prices of goods and services continue to rise. Thus, this study analyzed the exchange rate-inflation relationship in Nigeria using autoregressive distributive lag (ARDL) approach. The data for the study were collected from National Bureau of statistics (NBS) for the
period1 1981 to 2023. The data collected were analyzed using Augmented Dickey Fuller test and autoregressive distributive lag (ARDL) model. The result of the data analysis revealed that there is no long relationship between inflation and exchange rate in Nigeria for the period under study.
The results of the ARDL short run estimates revealed that there is a significant relationship between inflation rate and official exchange rate ((p<0.05). However, there is no significant relationship between inflation rate and bureau de change in the short run (p>0.05). Based on these findings, it was recommended among others that there is need for adjusting exchange rate stabilization policy by the government that will help businesses and individuals to invest more,
which in turn, decrease importation thereby reducing inflation in the country.