Exchange Rate Variation And Inflation In Nigeria

Exchange Rate Variation and Inflation in Nigeria

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We adopted the Augmented Dickey- Fuller to carry out the unit root test and cointegration with Johansen test. Our result shows that the individual variables are integrated order one, that is a unit root exist. This means that each variable tends to follow a random walk.

On the other hand, inflation rate, exchange rate, oil revenue, government spending and money supply are cointegrated.

This revealed a strong relationship among the variables though inflation rate and exchange rate show no long term relationship, but short term relationship seems to exist between them. We want to thank the Department of Financial Economics for giving our opportunity to commence his program and the thesis in the first instance, to do the necessary research work. We are deeply indebted to my supervisor Bernd-Joachim Schuller PhD whose advice, stimulating suggestions and encouragement helped ours in all the time of research for and writing of this thesis.

We thank almighty God, for sustaining us during the program, furthermore thanks to and all our lecturers, especially Hans Morner and Max Zamanian PhD whose role as lecturers gave us enduring foundation. Finally thanks to our family segmentation 2. Study Methodology———————————————-9 1. Exchange Rate——————————————————17 3. Co-integration, Inflation and Government Expenditure——44 4.

Disclaimer

Inflation is one of the most frequently used terms in economic discussions, yet the concept is variously misconstrued. There are various schools of thought on inflation, but there is a consensus among economists that inflation is a continuous rise in the prices. Simply put, inflation depicts an economist situation where there is a general rise in prices of goods and services, continuously. When there is inflation, the currency losses purchasing power. The purchasing power of a given amount of naira currency will be smaller over time when there is inflation in the economy.

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For instance, assuming N In the definition of inflation, two key words must be borne in mind. First, is aggregate or general, which implies the rise in prices that constitutes inflation must cover the entire basket of goods in the economy as distinct from an isolated rise in the prices of a single commodity or group of commodities? The implication here is that changes in the individual prices or any combination of the prices cannot be considered as the occurrence of inflation. However, a situation may arise such that a change in an individual price could cause the other prices to rise.

An example is petroleum product prices in Nigeria. This again does not signal inflation unless the price adjustment in the basket is such that the aggregate price level is induced to rise. Second, the rise in the aggregate level of price must be continuous for inflation to be said to have occurred. Broadly, inflation can be grouped into four types, according to its magnitude: 1. Such an increase in prices is regarded safe and essential for economic growth.

Walking Inflation: Occurs when prices rise moderately and annual rate is a single digit. Inflation of this kind is a warning signal for government or policy 5 makers to control it before it turns into running inflation. Running Inflation: When prices rise rapidly at the rate of between 10 percent and 20 percent per annum, it is called running inflation.

The middle class and the poor feel the bite.

Only strong monetary and fiscal measures can control such inflation. This is where the Nigeria economy finds her self in the last two and half decades which to this moment is still an issue in the economy. Hyper Inflation: When prices double or triple in digit rates, that could result in a situation where inflation rate can no longer be measured or controlled.]

Exchange Rate Variation and Inflation in Nigeria Video

16 4 Exchange rates and relative inflation

Exchange Rate Variation and Inflation in Nigeria - assured, what

This study made use of Ordinary Least Square OLS regression in analyzing the impact of exchange rate variations on inflation in Nigeria. There are also other variables that determine the impact of exchange rate on inflation in Nigeria in the last 30 years by evaluating the relationship between government expenditure, money supply, exchange rate and inflation as the dependent variables. This revealed a strong relationship between inflation rate and government expenditure and a negative relationship between exchange rate and inflation. Given two currencies, the Naira and the US Dollar, for example, the exchange rate between naira and the dollar is equal to the units of naira needed to purchase one unit of the unit of the US dollar. The exchange rate is one of the intermediate policy variables through which monetary policy is transmitted to the larger economy through its impact on the value of domestic currency, domestic inflation the pass through effect , the external sector, macroeconomic credibility, capital flows, and monetary and financial stability. Thus, exchange rate might induce changes in relative prices of goods and services, and the level of spending by individuals and firms, especially if significant levels of their wealth are held in foreign currencies. An appreciation in the value of an exchange rate rise makes imported goods and services relatively cheap, while depreciation makes export become cheaper to foreign buyers, thereby inducing higher competition in export markets at home. Exchange Rate Variation and Inflation in Nigeria

Exchange Rate Variation and Inflation in Nigeria - something

The adverse consequences of inflationary pressure from exchange rate instability have been a serious concern for economists, monetary theory authorities and policy analyst, owing to the fact that exchange rate and inflation rate are the major instruments for measuring economic performance. Consequently assessing link between monetary policy, exchange rate and inflation rate is very essential because the understanding of the relationship between these variables is a prerequisite for adoption of inflation targeting which the government of Nigeria has made a prime objective in the attainment of its macroeconomic objective. Exchange rate has to be right since it has a meaningful price that impacts on other prices. Where the volatility of exchange rate persists, the situation will be counterproductive in actualizing the goal of price stability. It impacts on inflation, money growth, income and exchange rate which its movement has remained the focal issue when examining the long term causes of inflation in an economy. Again factors like agricultural problems supply, rapid exchange rate depreciation and fragmentation between supply and demand in some sectors of the economy are recognized causes of inflation Akpan Inflation is fundamentally a monetary phenomenon. This is because it is usually associated with a continuous and consistent rise in general price in an economy. In Nigeria economic system for instance, a significant problem that has always been at the fore is the astronomical inflationary trend and devaluation in the value of naira.