The Dynamic Impact of Exchange Rate Volatility and Money Supply on Inflation in Nigeria: Empirical Evidence from ARDL Bound Testing Approach.
DOI:
https://doi.org/10.70861/ujed20250103007Keywords:
Money supply, Inflation, Monetary policy, Exchange Rate Pass ThroughAbstract
This study analyzes the impacts of exchange rate and money supply on inflation in Nigeria from 1986 to 2023 using an Autoregressive Distributed Lag (ARDL) framework and annual data from the Central Bank of Nigeria and the National Bureau of Statistics. Anchored on the Exchange Rate Pass-Through theory, unit-root and bounds tests reveal a mixed order of integration and no evidence of long-run cointegration among the variables. Short-run estimates highlight a strong contemporaneous inflationary impact of money supply (LMS = 2.65, p < 0.01) followed by a significant corrective lag (LMS(–1) = –2.13, p < 0.05). Government capital expenditure dampens prices both immediately (–0.64, p < 0.05) and with a lag (–0.68, p < 0.05), while the monetary policy rate provides a modest disinflationary impact (–0.06, p < 0.05). In contrast, exchange rate fluctuations, government recurrent expenditure, and economic growth are statistically insignificant. These findings emphasize the need for tighter monetary control, sustained capital spending, and a transparent, market-reflective exchange-rate regime to stabilize prices and manage inflationary pressures in Nigeria.
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