Inflation and Exchange Rate Volatility Pass-Through in Nigeria

Authors: 
Matthew Oladapo Gidigbi, Gbenga Festus Babarinde, Mukhtar Wakil Lawan
DOI Number: 
http://doi.org/10.31039/jomeino.2018.2.3.2
Abstract: 
The paper investigates the impact of exchange rate volatility pass-through on price inflation in Nigeria. Annualised time-series data ranging from 1981 to 2015 was used and due to adjustment and generation of data for other variables from the sourced data, the paper used 30 years annualised data for its estimation. Vector Error Correction Model (VECM) was used to estimate the relationship that exists between the stated key variables. VECM estimation shows that all the variables specified in the model are relevant in Granger causing inflation in the long-run. ECM at long-run indicates a correction of deviation in one period and this is statistically significant at the 1 per cent significance level. We found no short-run relationship between inflation and exchange rate volatility, likewise with government expenditure, import, foreign direct investment and trade openness. However, money supply exhibited a positive relationship with inflation in the short-run. Variance decomposition makes it evident that other salient variables/factor included in the model contribute to change in inflation more than exchange rate volatility. We recommend that federal government agencies in Nigeria especially the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance (FMF) should continue to take inflation targeting in the long-term as part of its monetary policy regime. The CBN should start given attention to the trade openness and foreign direct investment in managing the inflation. This paper discredits the public opinion that exchange rate volatility warranted inflation in the short-run. The paper investigates the impact of exchange rate volatility on inflation in Nigeria.
Keywords: 
Time Series Inflation, Exchange Rate Volatility, Money Supply, Public Expenditure, Trade Openness, GARCH and VECM.
Full Text: 
File download
References: 

Adeniji, S. O. (2013). Exchange rate volatility and inflation upturn in Nigeria: Testing for vector error correction model. Munich Personal RePEc Archive (MPRA)(Paper No. 52062), 1 - 20.

Arinde, A. A. (2002). An introduction to money, banking and finance in Nigeria. Ibadan: DBM Ventures.

Bala, D. A., & Asemota, J. O. (2013). Exchange rates volatility in Nigeria: Application of GARCH models with an exogenous break. CBN Journal of Applied Statistics, 4(1), 89 - 116.

BBC News. (2016, June 15). Nigeria allows naira to float against US dollar. Retrieved from BBC Business News: http://www.bbc.com/news/business-36538379

Bobai, F. D., Ubangida, S., & Umar, Y. S. (2013). An assessment of exchange rate volatility and inflation in Nigeria. Journal of Emerging Issues in Economics, Finance and Banking, 1(4), 321 - 340.

Central Bank of Nigeria. (2014). 2014 Annual Report. Abuja: Central Bank of Nigeria. Retrieved from http://www.cbn.gov.ng

Central Bank of Nigeria. (2015). Statistical Bulletin. Abuja: Central Bank of Nigeria.

Copeland, L. S. (2005). Exchange Rates and International Finance (4th ed.). England: Pearson Education Limited.

Doya, D. M. (2016, December 15). Nigerian Inflation Accelerates for 13th Consecutive Month. Retrieved from Bloomberg Markets: https://www.bloomberg.com/news/articles/2016-12-15/nigeria-inflation-cli...

Erol, T., & Wijnbergen, S. V. (1997). Real exchange rate targeting and inflation: An empirical analysis with policy credibility. World Development, 25(10), 1717 - 1730.

Esezobor, E. A. (2009). International Finance. Lagos: Chartered Institute of Bankers of Nigeria.

Ezike, E. (2009). International Business Finance and Management. Palmgrove: Concept Publications Limited.

Gidigbi, M. O., & Akanegbu, B. (2017, June). Does financial integration exist in ECOWAS? Journal of Social and Development Sciences, 8(2), 14 - 27. Retrieved from https://ifrnd.org/journal/index.php/jsds/article/view/1793

Goldberg, P., & Knetter, M. (1997). Goods prices and exchange rates: What have we learned? Journal of Economic Literature, 35(3).

Greene, W. H. (2003). Advanced Econometric Analysis. New Jersey: Prentice Hall.

Gujarati, D. N., & Porter, D. C. (2009). Basic Econometrics (International Edition (5th Ed.) ed.). New York: McGraw-Hill Companies Inc.

Inam, U. S. (2015). Exchange rate volatility and inflation in Nigeria: An empirical investigation (1970 - 2011). Research on Humanities and Social Sciences, 5(16), 1 - 9.

Jhingan, M. L. (2010). Macroeconomic Theory (12th ed.). Delhi: Vrinda Publications(P) Ltd.

Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59, 1551 -- 1580.

Kanamori, T., & Zhao, Z. (2006). The Renminbi exchange rate revaluation: theory, practice and lessons from Japan. ADBI Policy Papers(9).

Monetary Policy Department, CBN. (2006). What is the exchange rate channel of monetary policy transmission? Retrieved March 5, 2018, from Lecture Series 17: www.cbn.gov.ng/EducationalResources/lectureseries17

Mulwa, B. D. (2013, October). The effect of exchange rate volatility on inflation rates in Kenya. Nairobi: University of Nairobi.

Nweze, C. (2017, August 22). How CBN is tackling inflation, exchange rate volatility. Retrieved from The Nation Newspaper.

Obiekwe, E., & Osubuohien, E. (2016). Exchange rate pass-through, exchange rate volatility and the inflation rate in Nigeria. 3rd International Conference on African Development Issues (CU-ICADI 2016) (pp. 82 - 89). Otta: Covenant University Press.

Okoli, T. T., Mbah, S. A., & Agu, O. C. (2016). Exchange rate volatility and inflation: The Nigerian experience. Journal of Economics and Sustainable Development, 7(10), 1 - 15.

Olusola, O., & Opeyemi, A. (2013). Exchange rate volatility in Nigeria: Evidence from a parametric measure. Australian Journal of Business and Management Research, 3(5), 12 - 17.

Pandey, I. M. (2008). Financial Management. New Delhi: Vikas Ltd.

The Economist. (2016, March 17). How to make a hard-currency shortage worse: Can you spare a dollar? Retrieved from The Economist: http://www.economist.com/news/middle-east-and-africa/21695065-how-make-h...

Ukemenam, A. I. (2016). Impact of exchange rate volatility on the Nigerian economy 1987 - 2015. Nsukka: University of Nigeria.

Unuafe, K. O. (2005). Finance of International Trade I. Offa: Author.

Page: 
18-40
Content Status: 
Published