Inflation Rate, Exchange Rate Volatility and Exchange Rate Pass-Through Nexus:The Nigerian Experience

Abstract

In recent times, the Nigerian economy has been experiencing significant exchange rate fluctuations, particularly depreciation in the foreign exchange market which has been accompanied with inflation. Thus, this paper investigates the degree of passthrough of the official and parallel exchange rates to inflation as well as the relationship between exchange rate volatility and inflation in Nigeria based on monthly time series data (January 2006 to December 2015). In achieving its objectives, the study employs the Generalised Auto Regressive Conditional Heteroscedasticity (GARCH), technique, which was complemented using Co-integration, Vector Error Correction Model, Variance Decomposition and Impulse Response techniques. The results suggest that the parallel exchange rate passes through to inflation in the short run while the officialexchange rate passes through to inflation in the long-run exclusively. It also reveals that exchange rate volatility has a positive and significant effect on inflation in the long-run

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