Market power, inflation, and exchange rates in Nigeria economy: The Ripple effect

Abstract

When firms have substantial pricing discretion, it may adjust prices frequently in response to
changing market conditions or demand, leading to fluctuations in the inflation rate. Excessive
market power can severely threaten macroeconomic stability, distorting price signals, reducing
efficiency, increasing general spending, and hindering economic growth. Thus, the study
examines the impact of inflation and exchange rates on Nigeria's general consumption
expenditure and market power. Time series data from the World Development Indicator (WDI)
of the Word Bank from 1990-2022 were used for the study. Stationarity Test, Cointegration, and
Auto-regressive Distribution Lag (ARDL) were used. Findings from the study indicated that all
the variables were stationary at ground level I(0) and first difference I(1). The Johansen
Cointegration test revealed that the trace statistics and the maximum eigenvalue are less than
the 5% critical value, implying a long relationship among the variables. The ARDL model shows
that the inflation and exchange rates, with their lagged values, significantly impact the general
consumption expenditure. The study recommends that the Central Bank of Nigeria should
employ different policy tools including monetary policy, fiscal policies to manage inflation, and
stabilize exchange rates. The effectiveness of these policies can influence consumer confidence,
investment decisions, and overall market dynamics.