Global Journal of Commerce & Management Perspective
Open Access

Abstract

Exchange Rate Volatility, Devaluation and Price Level Dynamics in Nigeria

Bakare A.S

Empirical cross-country studies have yielded ambiguous results with respect to the impact of exchange rate volatility on the value of currency and the general price levels. In practice, hyperinflation has generally been a byproduct of other macroeconomic policy choices, rather than of a particular form of exchange rate regime. This study however examined if any significant relationship exist between exchange rate volatility, the distortion in the general price level and devaluation in Nigeria. Ordinary least square regression analytical technique (OLS) was employed for the empirical study. This analytical technique is suitable because it is efficient in term of output and adequacy of statistics generated. Since the study makes use of time series secondary data, we checked the temporal properties of the variables in the model via unit root tests in order to determine the stationarity of the variables. The data were found stationary and co-integrated. The a priori expectation is that exchange rate volatility will impact negatively on general price level in Nigeria. In consonance with the a priori expectation; the study found that a significant and negative relationship exist between exchange rate volatility, general price level and devaluation in Nigeria. The results of the finding showed that; the past values of exchange rate volatility could be used to predict the present behaviour of general price level and the value of naira in Nigeria. The main conclusion of this study therefore is that exchange rate volatility caused the devaluation of Nigeria’s currency and it is a major factor for the upsurge of inflation in Nigeria. Hence our findings and conclusion support the need for the government to monitor the behaviours of the exchange rate and minimize its volatility.