The effect of inflation and exchange rate volatility on consumer buying behavior in Nigeria

This study examined the determinants of exchange rate volatility basing evidence on 7 African countries; Niger, Sudan, Cameron, Equatorial Guinea, Tunisia, Congo, and Cote D’Ivoire from 1990-2023. The study conducted the Autoregressive Distributive Lag (ARDL) bounds testing for co-integration and also estimated the error correction model. Furthermore, ARCH and GARCH models were analyzed to measure the volatility of a time series by fitting an autoregressive model to the squared residuals of the time series. The ARCH and GARCH results suggest the volatility of the exchange rate markets in the aforementioned countries is not random. The speed of adjustment of the volatility in the exchange rate of the Sudanese economy is 39%, in Niger Republic it is 50%, in Cameroon it is 52%, in Tunisia it is 55%, in Congo the speed is 32%, in Equatorial Guinea, the speed of adjustment is 58% and in Côte D’Ivoire the speed is 45%, respectively. The study found that the determinants of exchange rate volatility among African countries vary depending on the specific country. The observed volatility in the Sudanese exchange rate was anchored by the significant positive influence of inflation and income differentials as well as the significant negative influence of interest rate differential. In Niger Republic, exchange rate volatility was driven by the significant positive influence of productivity growth and money supply as well as the significant variation in oil prices and interest rate differentials. The observed short-run volatility in Cameroon's exchange rate was significantly and positively influenced by inflation differential and money supply variation whereas it was significantly but negatively propelled by interest rate differential and oil price shock. In Tunisia, exchange rate volatility was stimulated by the significant positive influence of inflation differential, productivity growth, oil price shock, and the significant negative role played by trade balance. The observed short-run volatility in the Congolese exchange rate was induced by the significant positive impact of inflation differential, income differential, trade balance, variation in money supply, and the significant negative impact of interest rate differential. In Equatorial Guinea, the observed exchange rate volatility was determined based on the significant and positive impact of differential in the inflation rate, oil price shock, changes in the money stock, and the foreign balance of trade. The observed volatility in the Côte D’Ivoire exchange rate was significantly and positively driven by the differentials in inflation rate, interest rate, and income level, the foreign trade balance but significantly stimulated by the negative influence of oil price shock. The general policy advice is that governments of all the countries covered by the study should implement exchange rate controls to limit the volatility of their currency fluctuation by imposing a limit on the amount of foreign currency that can be traded in the country. African governments should monitor the inflation differential between their own country and their trading partners to see if it is becoming too large. If it is, the government might raise interest rates to make its currency more attractive to investors.

This paper investigates the joint impact of interest rate and exchange rate volatility on the performance of the informal sector in Nigeria, focusing on Small and Medium-sized Enterprises (SMEs). The annual time-series data on the exchange and interest rates for the period 1981-2018 were obtained from where exchange and interest rates volatility data were computed. The data analysis was carried out using descriptive statistics, correlation, a unit root test, an Autoregressive Distributed Lag (ARDL) bound test for cointegration and the ARCH regression model. The results obtained by the ARDL bound test confirmed the presence of the long-term relationship between interest and exchange rates volatility and SMEs' performance, which suggests that all the variables of interest move together in the long run. Moreover, the ARCH regression model showed a positive impact of exchange and interest rates volatility on SMEs' performance. However, only exchange rate volatility was significant. Thus, policy makers should pursue the interest rate and exchange rate regimes that will encourage massive investments in SMEs. This, in turn, would increase the performance of SMEs. Also, the monetary authorities should implement the policies aimed at curtailing incessant volatility in the exchange rate and the interest rate so as to protect SMEs from the external perturbations of the movements of the exchange rate and the interest rate.

The impact of exchange rate and oil prices fluctuation on the stock market has been a subject of hot debate among researchers. This study examined the impact of both the exchange rate volatility and oil price volatility on stock market volatility in Nigeria, so as to guide policy formulation based on the fact that the nation’s economy was foreign induced and mono-cultured with heavy dependence on oil. EGARCH estimation techniques were employed to examine if either the volatility in exchange rate, oil price volatility or both experts on stock market volatility in Nigeria. The result shows that share price volatility is induced by both the exchange rate volatility and oil price volatility. Thus, it is recommended that policymakers should pursue policies that tend to stabilize the exchange rate regime on the one hand, and guarantee the net oil exporting position for the economy, that market practitioners should formulate portfolio strategies in such a way that volatility in both exchange rates and oil price will be factored in time when investment decisions are being made.

According to the theory of purchasing power parity (PPP), exchange-rate movements offset the effect of relative price changes on the terms of trade, thus serving as a stabilizing influence on an economy’s external position, protecting real variables from local shocks. In practice, however, exchange rates have deviated substantially and for lengthy periods from the rates implied by PPP, and in this case, exchange-rate movements, rather than serving to absorb real shocks (as in PPP), are a potential cause of shocks.1,2 An additional but separate issue of concern relates to the volatility of nominal and real exchange rates, a marked feature of recent experience of flexible exchange-rate regimes. Various studies have emerged exploring the impact of exchange-rate volatility (and associated uncertainty) on investment and growth (discussed further below). In this chapter we extend the literature, using an original database to explore the relationship between foreign direct investment and exchange-rate variability, with respect to both the level and volatility of exchange rates, for the case of the United Kingdom between 1997 and 2001.

This study aims to analyze the effect of inflation and interest rates on rupiah exchange rate fluctuations during the period January 2023–December 2024. The study uses a quantitative approach with multiple linear regression methods on monthly data sourced from the Central Statistics Agency and Bank Indonesia. The independent variables include inflation and interest rates (BI 7-Day Reverse Repo Rate), while the dependent variable is the fluctuation of the rupiah exchange rate against the US dollar. The results show that, both partially and simultaneously, inflation and interest rates do not have a significant effect on the fluctuation of the rupiah exchange rate. This finding indicates that exchange rate dynamics during the study period were more influenced by external pressures than by domestic macroeconomic factors. The scientific contribution of this research lies in presenting the latest empirical evidence on the weakening effectiveness of domestic monetary policy transmission on exchange rate volatility in the context of global monetary tightening. Theoretically, these results confirm that the interest rate parity approach and monetary framework are not always able to explain short-term exchange rate fluctuations when external factors are dominant. The implication is that foreign exchange risk management needs to strengthen hedging strategies, businesses must anticipate potential increases in import costs due to exchange rate volatility, and pricing decisions need to consider exchange rate uncertainty as a strategic factor that is not fully responsive to domestic interest rate policy.

The study aims to look at macroeconomic variables’ impact on volatility of exchange rate in both short and long run. The relationship between real effective exchange rate volatility and macroeconomic variables such as gross domestic product deflator, total export in percentage of GDP, inflation rate, coefficient of inflation rate and lending interest rate have been analyzed with the help of statistical tool. This research is based on secondary data obtained from World Bank website, International Monetary Fund website and Statistical Department of Malaysia. The study uses a sample of 35 observations, starting from 1980 to 2014 annually. Unit root test is used to determine the stationarity of the variables. The existence of the stationary data will lead to a long run relationship of macroeconomic determinants, while the techniques of co-integration model are used to determine the long run relationship of some macroeconomic variables on the volatility of exchange rate. The error correction model is used to generate a short run model on this study by generating residual or error correction term. The findings revealed that the coefficient of the gross domestic product deflator, total export in percentage of GDP, and inflation rate are significant toward the volatility of real effective exchange rate in the long run. On the other hand, only the coefficient of inflation rate, and lending interest rate have significant relationship with the real effective exchange rate volatility in the short run.

The financial performance of manufacturing companies in Nigeria has been increasingly unstable, marked by fluctuating profitability, declining returns, and rising costs. This instability is largely attributed to persistent inflation and exchange rate volatility, both of which have intensified in recent years. The study examines the effect of inflation and exchange rates, on the financial performance of selected quoted manufacturing companies in Nigeria, using Tobin's Q as a proxy for firm performance. The study adopts ex-post factor research design and covered 43 quoted manufacturing firms in Nigeria. Utilizing panel data from 2014 to 2023 which was extracted from published annual reports of Statistical Bulletin of the Central Bank of Nigeria, National Bureau of Statistics and Nigerian Stock Exchange and applied regression analysis through the least squares method. The study found that both inflation and exchange rates have negative and significant effect on financial performance (Tobin's Q) of selected quoted manufacturing firms in Nigeria 5% significant level. The study concludes that inflation and exchange rates negatively influence financial performance (Tobin's Q) of selected quoted manufacturing firms in Nigeria. the study therefore, recommend that manufacturing companies in Nigeria should strengthen their resilience to rising inflation-related production costs by enhancing operational efficiency through energy-efficient technologies and waste reduction. The study also recommends that manufacturing companies in Nigeria should implement strong foreign exchange risk management strategies, such as hedging with forward contracts or options, to protect against exchange rate volatility.

Purpose- Many studies pointing out that the exchange rate depreciations underlies of the inflation problem, which is still keep up to-date, provides empirical evidences about the existence of a direct relationship between the exchange rate and domestic prices. In addition to this phenomenon called exchange rate pass-through, we also think that exchange rate volatility can also have an impact on domestic prices. The aim of this study is to investigate the relationship between inflation and exchange rate volatility, which is characterized by the increase in risks and the creation of an environment of uncertainty in Turkish economy. Methodology- In our study, we run an augmented philips curve equation to estimate the effect of exchange rate volatility and other variables on inflation. We measure exchange rate volatility as the standard deviation and GARCH (1,1), which are frequently used in the literature. In addition, we use the time-varying parameter approach to estimate the direction in which the effect of exchange rate volatility on inflation changes over time. Findings- According to the findings, the parameters in the philips curve equation are statistically significant and reasonable in line with the economic theory. The coefficient of inflation inertia is estimated to be 0.33. This indicates that approximately one-third of a 1% increase in inflation comes from past inflation. The ERPT is calculated as 18% for the short term and 27% for the long term. The fact that the exchange rate volatility parameters are statistically significant confirms our hypothesis. Accordingly, an increase of 1 conditional standard deviation in exchange rate volatility leads to an increase in domestic prices by 0.71. We also provide evidences that the impact of both exchange rate and exchange rate volatility on inflation increases over time. Conclusion- The results show that, in addition to the exchange rate, exchange rate volatility also has a significant effect on inflation. This provides credible evidences that exchange rate uncertainty should be an additional indicator, such as the exchange rate, to achieve price stability and monetary policy goals. Keywords: Exchange rate volatility, exchange rate pass-through, inflation, time-series models, monetary policy JEL Codes: E31, C32, E52

PurposeThe purpose of this paper is to evaluate selected West African currencies/US dollar exchange rates for the evidence of volatility spillover. Specifically, the paper examines West African CFA franc, Gambian dalasi and Nigerian naira exchange rates in relation to the USD, for any evidence of shock and volatility spillover.Design/methodology/approachThe author employs multivariate GARCH (1,1)–BEKK model which enables the evaluation of the interaction within the volatility of two or more series because of its capability to detect volatility spillover among time series observations, as well as the persistence of volatility within each series.FindingsThe major findings of this study are as follows: there is evidence of volatility clustering in West African CFA franc, Gambian dalasi and Nigerian naira exchange rates in relation to the USD. There is evidence of bi-directional shock and volatility spillover between the Nigerian naira and West African CFA franc/USD exchange rates, and uni-directional shock spillover from the Gambian dalasi to the West African CFA franc/USD exchange rates. There is, however, no evidence of exchange rate shock and volatility spillover between Nigerian naira and Gambian dalasi.Originality/valueAlthough considerable literature exists on the volatility of exchange rate in West Africa and comparative analysis of exchange rates volatility in few countries of West Africa, there is absence of empirical studies on exchange rate volatility spillover among countries in the region. Since containing exchange rate volatility is one of the major objectives of monetary policy, understanding the nature and direction of exchange rate volatility spillover would propel formulation exchange rate policies that would minimise exchange rate uncertainty and entrench sustainable development. In addition, the nature of exchange rate volatility spillover between West African countries would provide basis for international traders and foreign portfolio investors to develop effective strategies for hedging against exchange rate shocks that are propagated across countries by designing appropriate risk management techniques.

Two arguments advanced in favor of Mexico abandoning the peso and adopting the U.S. dollar are to lower exchange rate volatility and inflation. We are not able to identify an independent link between economic growth and either the exogenous component of exchange rate volatility or the exogenous component of inflation. Exchange rate volatility generally reflects other factors, rather than representing an independent growth determinant. The findings are consistent with theoretical predictions that inflation influences growth by affecting financial development. However, we present suggestive evidence that legal reforms offer greater financial development dividends for Mexico than adopting the dollar. Two OF THE MAIN ARGUMENTS advanced in favor of Mexico abandoning the peso and adopting the U.S. dollar are (1) to lower inflation (and inflation uncertainty) and (2) to reduce exchange rate volatility. From 1960 tol995, Mexico's annual inflation rate averaged about 24.5 percent, while inflation in the United States averaged 5.5 percent. In addition, Mexico has experienced severe exchange rate fluctuations against the dollar, especially in the last fifteen years. Supporters of complete believe that reducing the rate of inflation (which moves very closely with the volatility of inflation) toward U.S. levels and eliminating exchange rate variability vis-a-vis the U.S. dollar will enhance the business climate and thereby promote economic performance. If lower inflation rates and less exchange rate variability boost growth, then this strengthens the case for dollarization. If, however, inflation and exchange rate variability do not exert large impacts on economic activity, then the arguments in favor of dollarization must be sought elsewhere. Besides inflation and exchange rate volatility, policymakers must contemplate an array of factors in deciding on dollarization. Dollarization would eliminate discretionary monetary policy and limit lender of last resort facilities during financial sec

In this paper, the authors apply empirical evidence to demonstrate how important positive feedback trading factors are in understanding exchange rate behavior. Utilizing the GARCH augmented feedback model, or the exchange rate model set out by Laopodis, the author analyzes autocorrelation in exchange rate parameters and volatility in key ASEAN markets to yield deeper understanding of inducted exchange rates induced by the actions of positive feedback traders. The authors contend that positive feedback traders affect exchange rate volatility in ASEAN countries and induce the autocorrelation of negative returns within high exchange rate volatility. This study found that Singapore demonstrated a significant positive feedback trading during the period 1995–2014, while the authors further contend that Thailand, Indonesia, Malaysia, the Philippines, Brunei Darussalam, and Singapore also demonstrated positive feedback trading during the 1997–1998 Asian financial crisis. In addition to analyzing the positive feedback trading on exchange rate volatility, we also identify the exchange rate volatility spillover across the ASEAN countries. Related to this context, we found that Indonesia and Thailand play a dominant role as a dominant exchange rate volatility transmitter in the ASEAN region.

[…] The objective of this study is to fill the aforementioned gaps in the literature in the following way: extending the work of Driskill and McCafferty (1980) by including an output equation in order to account for domestic fiscal and international factors, we derive theoretically the determinants of exchange rate and output volatilities, assuming rational expectations under flexible exchange rates. At this point we address the role of the comovement of monetary and fiscal variables in the determination of exchange rate and output variability. Regarding the empirical investigation, we estimate multivariate GARCH models including all the variables of interest in the system specification. At a first stage, conditional variance and covariance vectors are computed. At a second stage a reduced form model is estimated in order to test for the causality of the proposed determinants of exchange rate and output volatilities, both in the short and long run. Therefore, the contribution of this dissertation is fourfold: First, we extend the model of Driskill and McCafferty (1980). Second, empirical analysis is conducted in order to explore the determinants of output volatility. Third, the empirical investigation of exchange rate volatility determinants is undertaken. Fourth, we use multivariate GARCH (BEKK) models for the simultaneous determination of volatility proxies of macroeconomic variables. The underlying questions of the study are the following: • Are changes in monetary and fiscal policy significant driving forces of exchange rate and output volatilities? • Does the volatility of international factors explain the fluctuations in exchange rate and output? • What is the role of the covariance of selected macroeconomic variables in the determination of volatility both in exchange rate and output? Is it significant? • What is the contribution of exchange rate regimes in the behavior of nominal and real exchange rate volatility? Two applications are undertaken to study the determinants of exchange rate and output volatilities. The first one considers the explanatory factors of output volatility for the sample of the G3 countries, namely, Germany, Japan and the U.S. over the period 1974- 2009 using quarterly data. The second application examines the determinants of nominal and real exchange rate volatility in three Latin American countries, namely, Argentina, Bolivia and Chile, using monthly data for the period 1979-2009. […]

Exchange rate misalignments, capital flows and volatility

This paper examines the impact of exchange rate variation on inflation in South Asian countries for the sample of the period 1981 to 2012 in a panel data framework rather than time series. The main purpose of this study is to examine whether exchange rate pass-through and/or volatility of exchange rate causes inflation in South Asian countries and what are the policy implications of it for the South Asian countries. This study first estimates inflation model for full sample (60 countries) and then estimates the inflation model for sub-sample of four South Asian countries (Bangladesh, India, Pakistan and Sri Lanka). For estimation of full sample this paper uses fixed effect model and GMM estimation techniques. In case of sub-sample (South Asian countries) this paper uses random effect model and GMM estimation techniques. While using full sample (for 60 countries), it is found that change in exchange rate has significant impact on inflation but exchange rate volatility has no impact on iflation. However, in case of South Asian countries both the exchange rate pass-through and volatility of exchange rate have significant impact on inflation. So, the policy makers of these four South Asian countries should take necessary steps for controlling inflation due to the volatility of exchange rate.

Effects of real effective exchange rate volatility on export earnings in Ethiopia: Symmetric and asymmetric effect analysis