Exchange Rate Variation and Inflation in Nigeria

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Max

School of Technology and Society

MASTER DEGREE PROJECT

EXCHANGE RATE VARIATION AND INFLATION IN NIGERIA (1970- 2007)

Master Degree Project in Economics and Finance D-Leval 15 ECTS Spring term Year 2008 Onosewalu Okhiria 761130-P319 Taofeek Sesan Saliu 761130-P719 Supervisor: Bernd-Joachim Schuller(PhD) Examiner: Max Zamanian (PhD)

ABSTRACT

This study examines the impact of exchange rate on inflation in Nigeria economy between 1970 and 2007. We analysed the trend of inflation and exchange rate in the last 38 years by evaluating the relationship between government expenditure, money supply, Oil revenue, exchange rate and inflation as the dependent variables. We adopted the Augmented Dickey- Fuller to carry out the
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Inflation is one of the most frequently used terms in economic discussions, yet the concept is variously misconstrued. There are various schools of thought on inflation, but there is a consensus among economists that inflation is a continuous rise in the prices. Simply put, inflation depicts an economist situation where there is a general rise in prices of goods and services, continuously. It could be defined as ‘a continue rise in prices as measured by an index such as the consumer price index (CPI) or by the implicit price deflator for Gross National Product (GNP). Inflation is frequently described as a state where “too much money is chasing too few goods”. When there is inflation, the currency losses purchasing power. The purchasing power of a given amount of naira (currency) will be smaller over time when there is inflation in the economy. For instance, assuming N10.00 (Nigeria unit currency) can purchase 10
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