Investigating the impact of exchange rate on inflation in Nigeria is of both practical and theoretical importance This study also examines the dynamic relationship between inflation, exchange rate, money supply, and real interest rate from 1980 to 2024. Using theories such as the Law of One Price and purchasing power parity as its foundation, this study investigates the extent to which domestic prices and exchange rate movements align with international arbitrage. Utilizing the ARDL approach to examine the short and long-run determinants of inflation. It investigates the effects of money supply, real interest rate, and exchange rate on inflation. The bounds test confirms the long-run relationship among variables. Short-run results show that lagged exchange rate movements have delayed effects on inflation, although immediate changes in exchange rate and money supply are insignificant. The ECM is significantly negative, indicating swift adjustment to long-run equilibrium, with approximately 62% of disequilibrium corrected within one period. The long run shows that the real interest rate has significant negative inflation. In conclusion, from 1980 to 2024, inflation is primarily influenced by the real interest rate and the lagged value of the exchange rate. This suggests that interest rate policies are more effective in controlling inflation than exchange rate or monetary expansion within this model framework. The study recommends that the central bank of Japan should focus on strengthening the interest rate channel as a targeting tool for inflation.
Okereke et al. (Thu,) studied this question.