Nigerian Economic Performance: Exploring Dynamics of Exchange Rate, Inflation and Economic Output

Abstract

This study explores the dynamic interaction between exchange rate, inflation and economic output in Nigeria between 1999 and 2017 using Vector Error Correction (VEC) granger causality test and Vector Error Correction Model (VECM). Results establish that there is unidirectional causality running from economic output (GDP) to exchange rate in Nigeria. The study further confirms that exchange rate significantly exerts a long run positive impact on economic performance in the country, while the impact of inflation on economic output in the long run is found to be negative. Furthermore, economic output exerts a negative impact on both inflation and exchange rate, but inflation positively influences exchange rate. Another evidence reveals that in the long run, exchange rate depreciation impacts positively on economic output, while inflation impacts negatively on output. The assertion that exchange rate depreciation leads to positive economic performance could be attributed to the positive long run effect of real sector development. Thus, the study suggests that policymakers should initiate measures that could aid financial and real sector development. Also, it is suggested that promoting the habit of consuming made in Nigeria goods, through awareness programmes and quality control measures could mitigate the inflationary effect of the external sector on Nigerian economy.