Impact of Monetary Growth and Exchange Rate Fluctuation on Inflation in Nigeria: 1986-2022

Abstract

The relationship between, monetary growth, exchanger rate fluctuation and inflation in Nigeria is an important one for policy makers. The objective of the paper was to examined the relationship between monetary growth, exchange rate fluctuations and inflation in Nigeria from 1986 to 2022. The research employed the techniques of Dynamic OLS, ARCH and GARCH models to estimate the variables of interest. Based on the empirical findings. It is established that inflation in Nigeria is significantly influenced by such dynamic variables as money supply growth rate, exchange rate and government expenditure growth rate; while real gross domestic product growth rate and interest rate insignificantly influenced the rate of inflation in Nigeria for the period 1986-2022. In line with theoretical assumptions, the findings confirmed that in the long run, inflation in Nigeria is positively related to increase in the monetary aggregate. The findings also established that in the long run fluctuation in the foreign prices negatively affects the level of inflation in Nigeria. Specifically, 1% increase in the monetary aggregate led to about 97% increase in the rate of inflation and 1% increase in exchange rate fluctuation led to about 8% decrease in the rate of inflation in Nigeria. The research also confirmed an inverse relationship between government expenditure growth rate and inflation in Nigeria. That is, a negative relationship exists between government expenditure growth rate and inflation in the model. This implies that a unit percent decrease in government expenditure growth increase the rate of inflation by over one hundred percent. Government should moderate money supply rate and also should endeavor to reduce monetary policy rate to encourage borrowings for SMEs growth in Nigeria.