Abstract

<p>The research studied the impact of variations in exchange rate on price stability in Nigeria. The objective of the research being to examine the impact of exchange rate fluctuations on price stability in Nigeria. To answer the question as to the extent exchange rate fluctuation has whether positive and significant impact on price stability in Nigeria or otherwise. The review of literature was structured in conceptual, theoretical and empirical parts. The methodology adopted in this research was modeled on regression using macro-economic variables such as consumer price index, exchange rate, import rate and export rate, Ofurum and Tobira (2011). The two-stage least square (2LS). The statistical properties of the 2LS are contained in the popular GaussMarkov theorem which sees the least squares estimators as unbiased linear estimator, having minimum variance. The model examines the relationship between a dependent variable and two or more regressor (independent variables). This suit the research since the intention of the researcher is to examine the impact of exchanges rate on these macro-economic variables on a variable by variable basis. In analyzing the data it was seen that exchange rate fluctuations has positive and non-significant impact on Nigeria’s consumer price index (coefficient of EXR = 0.218, t-value = 1.327). This indicates that a one percent increase in consumer in Nigeria may be due to 0.22 percent increases in exchange rate fluctuations. The probability value of 0.199 &gt; 0.05 confirms the non-significance of the result. The coefficient of determination which measures the goodness fit of the model as revealed by R-square (R2) indicates that 65.9% of the variations observed in the dependent variable were explained by variations in the dependent variable. This is quite high could be attributed to the inclusion of control variables such export rate (EXPR) and import rate (IMPR). The test of goodness of fit as indicated by R2 was properly adjusted by the Adjusted R-Square to 61.0%. In conclusion, Nigeria’s over dependence in the Oil and Gas sector of the economy has affected the major macroeconomic variables and adverse foreign exchange rate regimes have affected the Nigeria economy over the years. Nigeria’s failure to diversify its economy which would have helped cushion the effect of the constant changes in oil prices stems in part from weaknesses in the nation’s small and insular private sector. The recommendations of study include the adoption of budgetary polices that will reduce deficits budget in Nigeria hence reduction in inflation rate. Another recommendation is that inclusion of the parallel exchange rate market on major macro-economic variables in Nigeria. Finally, the study further recommends that more research be encouraged to examine the transmission mechanism of exchange rate on major macroeconomic variables in Nigeria. The channels through which exchange rate impact on these major macroeconomic variables will determine the appropriateness of policies.</p>