An investigation into exchange rate pass-through to inflation in Nigeria

Abstract

This study examines the relationship between exchange rate pass-through (ERPT) and inflation in Nigeria from 1985 to 2023, a period marked by persistent inflationary pressures and exchange rate volatility. Using secondary data from the Central Bank of Nigeria and World Development Indicators, the study applies unit root and cointegration tests, followed by an Autoregressive Distributed Lag (ARDL) model to capture both short- and long-run dynamics. Results reveal that exchange rate depreciation exerts a positive and statistically significant effect on the consumer price index, confirming strong ERPT in Nigeria. The findings highlight
that inflationary pressures are not only demand-driven but also heavily influenced by external shocks transmitted through the exchange rate channel. Policy implications suggest that exchange rate stability and disciplined monetary management are critical to moderating inflation, while structural reforms to boost domestic production and reduce import dependence are essential for long-term resilience. Coordinated monetary and fiscal policies, alongside transparent fuel pricing, will strengthen institutional credibility and enhance macroeconomic stability.