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

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 significance of government policy shift (exchange rate reform) on inflation. Evidence from the paper reveals that exchange rate policy reform is important in the determination of inflation in Nigeria. The forecast error variance decomposition results may imply that money supply and exchange rate exerted stronger dynamic effects on inflation forecast errors than output level. However, the slope-dummy results confirmed the impotence of exchange rate (flexible) policy reform on infl 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.