Keyword

Inflation, Exchange Rate, Money Supply, Nigeria

Abstract

One macro economics goal economist had always had interest in is price stability. This is because it directly affects the standard of living of the people and determines the level of poverty through the purchasing power theory. Such age long interest in developing countries such as Nigeria had been centered on its trend and determining factors, with differing findings, resulting into debate among policy makers. However, those findings mainly ascertained that inflation or price instability is the case in Nigeria and some other developing economies, with exchange rate and money supply playing major roles. This study employs time series econometrics technique, using mainly Augmented Dickey Fuller (ADF) and Philips Peron (PP) for stationarity and cointergration tests to situate Nigeria in this debate in a dynamic world. It uses quarterly data between 1981 and 2009, and finds that, “as it was in the beginning”, inflation remains the order of the day, and exchange rate devaluation and money supply have positive and significant effects on inflation in Nigeria, but in the long run only money supply matters. It then recommends among others, that until Nigeria is fully able to stimulate production for export in the long run, devaluation of the Naira should be discouraged. The study also recommends a continuous contractionary monetary policy to reduce inflation in Nigeria.


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