Page 1 of 14
Journal for Studies in Management and Planning
Available at http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 08
July 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 182
Effect of Exchange Rate Fluctuations on Inflation Rate in the
Nigerian Economy (1986-2015)
Atsanan, Angela Ngunan
Department of banking and finance, Faculty of Management Sciences Nnamadi Azikiwe
University Awka Anambra State, Nigeria
ABSTRACT
The study examined the effect of exchange
rate fluctuation on inflation rate in Nigeria.
The study covered the period of deregulated
economy from 1986 till 2015. Exchange rate
fluctuation was represented by nominal
exchange rate and supported with control
variables which includes interest rate,
money supply, imports and Gross Domestic
Product.(GDP) The Ordinary Least
Square(OLS) was used for data analysis and
the result has shown that interest rate is
significant and positively related to inflation
rate at about 1% level this indicates that
increase in interest rate can cause inflation
The study also has shown That exchange
rate and other macroeconomic variables
including interest rate, money supply,
imports and GDP are not the only factors
that have impact on inflation in Nigeria.
This suggests that macroeconomic variables
are not the major causes of inflation rate in
Nigeria. Social and political issues such as
unrests, consumer confidence, and political
landscape and so on can trigger inflation.
The study therefore recommended that
despite the use of monetary and fiscal
policies on controlling inflation and
unemployment, governments should pursue
diplomatic missions aimed at creating good
image for the country and public confidence
in the citizenry and monetary authorities
should ensure that interest rates measures
are put on check
Keywords: Exchange rate, Inflation,
Fluctuations, Interest rate, Economy
INTRODUCTION
In the recent time, Nigerian economy is
experiencing concurrent and unstable
volatility in inflation rate as well as exchange
rates. Ojo and Alege (2014) have argued that
the current high variability of exchange rate
fluctuations in Nigeria may generate adverse
effects in the form of higher price inflation
and larger output contraction. The theoretical
assertion came through in Nigeria in the
recent times with Nigeria witnessing
incessant fall in the value of Naira to US
dollar which is followed by high and
persistent rise in general prices of
commodities. The present study is fashioned
to explain the role of exchange rate
fluctuation on inflationary trend in Nigeria.
Statement of the Problem
An ample of empirical studies have being
carried out in recent times to explain
exchange rate fluctuation and inflation rate
nexus. These studies have produced
conflicting results which further throw
analysts and academia into confusion. The
proponents of positive effect tin Nigeria
(Odusola & Akihlo, 2001; Adetiloye, 2010;
Obiekwe & Osabuohien, 2016) suggest that
exchange rate depreciation should bring
about rising inflation rate. However, those
that support the negative effect hypothesis
(Audu & Amaegberi, 2013;Bobai,Ubangida
&Umar, 2013) posited that rising exchange
Page 2 of 14
Journal for Studies in Management and Planning
Available at http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 08
July 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 183
rate leads to decreasing inflation rate. Even
conflicting causal relation still exist in the
works of Mandizha (2014) and Okolil, Mbah
and Agu (2016). The researchers employed a
highly sophisticated econometric tools such
as GARCH, VECM and cointegration
techniques, yet these conflicts still exist, the
present study re-investigates the exchange
rate – inflation rate nexus using the OLS
which is a Best Linear and Unbiased
Estimate of linear models.
Objectives of the Study
The objective of the study is to examine the
effect of exchange rate fluctuations on
inflation rate in Nigeria. The specific
objectives include:
Hypotheses
Ho1: There is no significant relationship
between exchange rate fluctuations and
inflation rate in Nigeria.
Ho2: There is no significant relationship
between interest rate and inflation rate in
Nigeria.
Ho3: There is no significant relationship
between money supply and inflation rate in
Nigeria.
Ho4: There is no significant relationship
between imports and inflation rate in Nigeria.
Ho5: There is no significant relationship
between economic growth and inflation rate
in Nigeria.
Scope of the Study
The work covered freely floating exchange
rate regime starting from 1986 to 2015 in
Nigeria. The study included interest rate,
money supply, imports and GDP to the
exchange rate as the explanatory variables of
the study. Inflation rate is the dependent
variable.
EVIEW OF RELATED LITERATURE
Conceptual Framework review
The core concepts that need explanations in
this study are exchange rate,, inflation as
well as currency fluctuations.
Exchange Rates
Exchange rate is the rate at which one
currency is exchange for another (Jhingan,
2011), it is the price of one currency in terms
of another currency, exchange rate can be
customarily defined as the price of one unit
of the foreign currency in terms of the
domestic currency. Croushore, 2007), also
define exchange rate as the amount of one
unit of another currency. Pandey (2010) also
posits that exchange rate is the price of one
currency quoted in terms of another .the
exchange rate between countries varies due
to changes in demand and supply in the
foreign exchange market (Jhingan, 004)
.Countries often adopt either the fixed or
fluctuating exchange rate currencies
according to the need of the country or
policy decision to appreciate or depreciate
national currency (Jhingan, 2008). Odekunle
2012) enumerated two methods of
expressing exchange rate by way of
domestic currency units per unit of foreign
currency and foreign currency units per unit
of the domestic currency.
Exchange Rate Fluctuation
Currencies are exchanged for one another in
international trade. The rate at which one
currency will be exchanged for another, that
is, the value of a country’s currency in terms
of another, is what Saheed and Ayodeji
(2012) termed exchange rate.In the view of
Ojo and Alege (2014), it is defined as the
domestic price of foreign money. These
Page 3 of 14
Journal for Studies in Management and Planning
Available at http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 08
July 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 184
definitions show that exchange rate is a term
to explain the value of one currency in
relation to another currency. For instance, the
value of Nigerian Naira in relation to USA
dollar or United Kingdom (U.K) pounds.
Exchange rate can be denoted in nominal or
real terms. The nominal exchange rate is a
monetary concept, which measures the
relative price of the two moneys or
currencies e.g. Naira in relation to U.S dollar;
while Real exchange rate is being regarded as
real concept that measured the relative price
of two tradable goods (exports and imports)
in relation to non-tradable goods (goods and
services produced. Because it is so visible,
the nominal exchange rate is a sensitive
policy indicator; yet, for purposes of growth
analysis, economic managers need to focus
on trends in the real exchange rate
(McPherson & Rakovski, 2000).
The frequency of changes in exchange rate
can be termed fluctuation. Jongbo (2014)
described the erratic fluctuations in exchange
rates as periods of domestic currency
appreciation or depreciation. Osinubi and
Amaghionyeodiwe (2009) measured
exchange rate fluctuation as the standard
deviation of the exchange rate. They
calculated it as the annual standard deviation
of the log of the monthly changes in the
exchange rate. Thus, exchange rate
fluctuation is the changes in exchange rate of
one currency in relation to another. This
changes results from the forces of demand
and supply that act on currency valuation.
Thus, exchange rate fluctuation is a new
concept that came up as a result of the
adoption of flexible exchange rate regime.
Inflation Rate
Inflation is a term to explain changes in the
price of goods and services. Jhingan (2005)
referred to inflation as a persistent and
appreciable rise in the general level of prices.
Generally, inflation has created a serious
problem in view of the fact that it affects an
economy, where her currency is
characterized by a persistent fall in the value
of the country’s currency and rise in her
exchange rate to the rest of the world. Thus,
economies in recent times have planned to
control the rate of inflation using inflation
targeting.
Inflation targeting is a policy in which an
estimated inflation target is made public and
deliberately pursued using the instruments of
monetary management such as interest rate to
steer actual inflation towards the desired
policy target (Audu & Amaegberi, 2013).
According to Savensson (1999), inflation
targeting framework sets out very clear the
goals for monetary policy, defines
responsibilities, and establishes measures of
accountability and transparency.
Inflation-targeting mechanisms have been
implemented with a view to curtail the
magnitudes of high inflation uncertainty
which generally results in inefficient resource
allocation and low productivity growth
(Audu & Amaegberi, 2013). According to
Oluba (2008) the characteristics of the
framework tend to strengthen transparency
and coherency of monetary policy thereby
eliminating uncertainties concerning future
inflation rates.
In an open economy, exchange rate
fluctuations affect the behaviour of domestic
inflation. This is referred to as exchange rate
pass-through effect. The magnitude of this
effect is a key for monetary policy as it
