Effects of Exchange Rate on Food Inflation in Nigeria: A Non-Linear ARDL Approach

Abstract

Over the years, exchange rate has been an unstable in the Nigerian economy, despite the stabilization policies  introduced by successive governments in the country. This has consequently affected the prices of food products in the  country. This study employed the Non-Linear ARDL model to examine the asymmetric effects of exchange rate on food  inflation in Nigeria, using quarterly data from 2008Q1 to 2020Q4. The results of bounds testing to Cointegration indicate  that there is a long-run relationship between exchange rate and food inflation along with GDP. In addition, both in the  long-run and short-run, there is a significant and asymmetric positive relationship between exchange rate and food  inflation. GDP is found to be negative and significant relationship on food inflation. Based on these findings, this study  recommends that the Central Bank of Nigeria (CBN) should continue to improve the operations of the foreign exchange  market to enhance its liquidity. Moreover, the CBN should apply tight monetary policies of price stability to help sustain  low food inflation rate. In addition, government through the CBN should create policy to ensure easy and direct access  to foreign exchange (FOREX) by individual and businesses. Lastly, Firms should continue to produce goods which help to  reduce the rate of importation despite unstable exchange rate in Nigeria.