EFFECT OF EXCHANGE RATE, EXPORT AND IMPORT ON INFLATION IN NIGERIA

Abstract

This study investigated the effect of exchange rate, export and import on inflation in Nigeria from 1970 to 2023 using Vector Error Correction Model (VECM) to determine the short run and long run impact of the parameters. Also, the variables were subjected to unit root tests using Augmented Dickey-Fuller (ADF) and Phillip-Perron (PP).  The unit root results found that the variables were integrated of order one, I(1) while the Johansen Cointegration test revealed evidence of long run relationship between exchange rate and inflation. The Granger causality test also indicated the exchange rate influences effect on inflation in Nigeria. The VECM indicated that exchange rates have a pass-through effect on inflation in both the short run and long run, suggesting that the depreciation of the exchange rate over the years has driven inflation in Nigeria. Also, the study found that export lowers inflation while import drives inflation. Therefore, the study recommends that the monetary authorities are advised to embark on implementing a more flexible exchange rate regime that is capable of absorbing the external shocks on the domestic prices, government should promote exports by encouraging domestic production and import substitution to reduce reliance on imports and government should discourage imports especially on consumer goods by encourages firms that produce for exports.