Exchange Rate and Inflationary Rate: Do They Interact? Evidence

The research paper examines the level, nature of association as well as the impact of exchange rate fluctuations on inflationary pressure and other selected macroeconomic indices in Nigeria between 1979 and 2010. Ordinary least squares method in the form of multiple regressions was applied to evaluate their association and impact and Granger Causality technique to evaluate their causality. Co integration procedure was also applied to assess whether their relationships will stand the test of time. A Stationary test was conducted using the Augmented Dickey- Fuller (ADF) tests. The result reveals that exchange rate and inflationary rate are positively related, though not to a very significant extent. This signifies that fluctuations in exchange rate can as well result in a proportionate response in the prevailing inflationary rate. The study reveals that there is no causality in any direction between exchange rate and inflationary rate. Unidirectional causality runs from interest rate to inflation. Interest rate and real GDP have no significant impact on exchange rate in Nigeria as revealed by the study. However, they both have negative relationship with exchange rate. Consequently, the paper recommends that monetary and fiscal policy setters should fashion out strategies to efficiently regulate and effectively manipulate the highly volatile macroeconomic indices in Nigeria in order to grow the economy faster and sustain it, even at the long run