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THE DYNAMICS OF INFLATION, PUBLIC DEBT AND EXCHANGE RATE IN NIGERIA
A b s t r a c t
This study examines the dynamic relationship between inflation, public debt and exchange rate for Nigeria from 1980-2016. The study uses Exploratory Data Analysis (EDA) and non-parametric approach, vector error correction model and Granger-Causality technique to empirically investigate the relationships in the short and long run. The EDA shows that CPI rate of inflation has a strong positive relationship with domestic debt and exchange rate and a weak positive association with external debt with kernel fit. The short run results show that the past values of inflation and domestic debt significantly influences the current value of inflation while external debt and exchange rate are positive but less significant in the near future. The result also shows that the explanatory variables have negative influence on inflation in the long-run. In Nigeria, we can reject the hypothesis that inflation does not granger cause domestic debt, external debt and exchange rate. A unidirectional relationship is found for domestic debt, external debt and exchange rate. The study recommends that policy makers need to formulate appropriate and prudent policy targeted at reducing both the domestic debt and exchange rate simultaneously in the short run.
Keywords:
Inflation
Public Debt
Exchange Rate VECM