An Econometric Analysis of the Nexus of Exchange Rate, Inflation and Budget Deficit: Case of Nigeria 1981 – 2016

Abstract

Depreciation of the naira has a role to play in Nigeria's recent inflationary process. Concomitant with this is the substantial budget deficit operated annually by the Federal Government in the last decade or so. Part of the budget deficit is finance through bank credit which directly affects the money base. This also exerts upward pressure on the general price level. All this suggests that there are many sources of the current inflation. While the channels through which exchange rate depreciation affects prices are known, the extent to which this phenomenon engenders price inflation in Nigeria is still not well researched. As part of the attempt to fill this gap, this study examines the quantitative effects of exchange rate depreciation on budget deficit and inflation in Nigeria. This is achieved in two stages. First, a structural model of the interaction between exchange rate, budget deficit, inflation, and government revenue and expenditure is constructed. In doing this, the study is influenced by SVAR cointegration and the error correction model. This result presents trends in the relationship between exchange rate, budget deficit and inflation and the impact exchange rate on inflation and budget deficit are positive but not statically significant and incomplete. The findings from this study have a number of policy implications for Nigeria government. A major policy implication of the results of the study is that concerted effort should be made by the Nigeria's government to strengthen the production capacity of domestic firms and industries in order to reduce the level of the imported consumer and capital goods. This will help improve the level of exchange rate impact on other macroeconomic variables in Nigeria.

A Test of the Fiscal Theory of Price Level: Case Study of Nigeria

“…Suleiman Sa'ad et al (2018) evaluates the quantitative effects of exchange rate depreciation on budget deficit and inflation in Nigeria with SVAR, cointegration and the error correction model. The outcome shows trend in the affiliation between exchange rate, budget deficit and inflation and a positive impact on exchange rate, inflation and budget deficit but not statistically significant.…”

Fiscal Dominance and the Effectiveness of Monetary Authority in Nigeria 1980-2020

“…Suleiman, Alexander and Olure-Bank [41] assessed the quantitative impacts of budget shortfall and Naira exchange rate and how they impact price levels in Nigeria. The study used SVAR and found a zero impact of the public spending shortfall and the Naira exchange rate on the price level.…”

Impact of Globalization on Major Macroeconomic Variables: Empirical Evidence from Pakistan

“…The performance of various macroeconomic indicators is now becoming greatly influences by the global economic factors (Kuchukova et al, 2016;Mishchenko et al, 2018;Molocwa, 2018;Suleiman Sa'ad & Michael, 2018). Globalization in recent times is significantly impacting the economic dynamics of all the countries.…”

“…Globalization is not new but its changing magnitude has profound implications that vary with economies depending upon their dynamics, structure and extent of openness (Taylor, 2006). More open economies have greater ability to capture new ideas (Obstfeld, 2004;Molocwa, 2018;Suleiman Sa'ad & Michael, 2018).…”