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

Received: 18 December 2017     Accepted: 3 January 2018     Published: 19 January 2018
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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.

Published in Journal of World Economic Research (Volume 7, Issue 1)
DOI 10.11648/j.jwer.20180701.11
Page(s) 1-13
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2018. Published by Science Publishing Group

Keywords

Foreign Exchange Rate Pass Through, Consumer Price, Budget Deficit, Cointegration

References
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Cite This Article
  • APA Style

    Suleiman Sa’ad, Alexander Abraham, Olure-Bank Adeyinka Michael. (2018). An Econometric Analysis of the Nexus of Exchange Rate, Inflation and Budget Deficit: Case of Nigeria 1981 – 2016. Journal of World Economic Research, 7(1), 1-13. https://doi.org/10.11648/j.jwer.20180701.11

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    ACS Style

    Suleiman Sa’ad; Alexander Abraham; Olure-Bank Adeyinka Michael. An Econometric Analysis of the Nexus of Exchange Rate, Inflation and Budget Deficit: Case of Nigeria 1981 – 2016. J. World Econ. Res. 2018, 7(1), 1-13. doi: 10.11648/j.jwer.20180701.11

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    AMA Style

    Suleiman Sa’ad, Alexander Abraham, Olure-Bank Adeyinka Michael. An Econometric Analysis of the Nexus of Exchange Rate, Inflation and Budget Deficit: Case of Nigeria 1981 – 2016. J World Econ Res. 2018;7(1):1-13. doi: 10.11648/j.jwer.20180701.11

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  • @article{10.11648/j.jwer.20180701.11,
      author = {Suleiman Sa’ad and Alexander Abraham and Olure-Bank Adeyinka Michael},
      title = {An Econometric Analysis of the Nexus of Exchange Rate, Inflation and Budget Deficit: Case of Nigeria 1981 – 2016},
      journal = {Journal of World Economic Research},
      volume = {7},
      number = {1},
      pages = {1-13},
      doi = {10.11648/j.jwer.20180701.11},
      url = {https://doi.org/10.11648/j.jwer.20180701.11},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jwer.20180701.11},
      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.},
     year = {2018}
    }
    

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    T1  - An Econometric Analysis of the Nexus of Exchange Rate, Inflation and Budget Deficit: Case of Nigeria 1981 – 2016
    AU  - Suleiman Sa’ad
    AU  - Alexander Abraham
    AU  - Olure-Bank Adeyinka Michael
    Y1  - 2018/01/19
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    DO  - 10.11648/j.jwer.20180701.11
    T2  - Journal of World Economic Research
    JF  - Journal of World Economic Research
    JO  - Journal of World Economic Research
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    EP  - 13
    PB  - Science Publishing Group
    SN  - 2328-7748
    UR  - https://doi.org/10.11648/j.jwer.20180701.11
    AB  - 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.
    VL  - 7
    IS  - 1
    ER  - 

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Author Information
  • Department of Economics, Faculty of Social Sciences, Nigeria Defence Academy, Kaduna, Nigeria

  • Department of Economics, Faculty of Social Sciences, Nigeria Defence Academy, Kaduna, Nigeria

  • Department of Economics, Faculty of Social Sciences, Nigeria Defence Academy, Kaduna, Nigeria

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