EXCHANGE RATE REFORM AND ITS INFLATIONARY CONSEQUENCES: THE CASE OF NIGERIA

Abstract

This paper examines the impact of price response to exchange rate changes in Nigeria, using annual data from the period 1970 to 2003. A vector error correction (VEC) model and slope-dummy methodology were estimated in order to determine the signifi cance of government policy shift (exchange rate reform) on in fl ation. Evidence from the paper reveals that exchange rate policy reform is important in the determination of infl ation in Nigeria. The forecast error variance decomposition results may imply that money supply and exchange rate exerted stronger dynamic effects on in fl ation forecast errors than output level. However, the slope-dummy results con fi rmed the impotence of exchange rate ( fl exible) policy reform on in fl ation. The paper suggests that whereas, a stable, consistent and complementary policy on money supply and exchange rate is required for price stability, the domestic output expansion (particularly agricultural output) is needed to meet the ever-growing food demand in Nigeria.Keywords: Nigeria, exchange rate, in fl ation, money supply, slope dummy, vector error correction

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