Exchange Rate and Inflation Dynamics in Nigeria: Evidence from Non-Linear ARDL and Diks-Panchenko Causality Approach

This study examined the relationships among exchange rate and inflation in Nigeria using monthly data from June 1999 to March 2025. Two methodological approaches were employed: Nonlinear Autoregressive Distributed Lag (NARDL) model to account for asymmetries in both the short and long run. Diks–Panchenko nonlinear causality test was also conducted to investigate the direction of causality among the variables. The findings revealed that exchange rate depreciation significantly increases inflation in both the short and long run, confirming the pass-through effect of exchange rate. Causality results indicated unidirectional causality from exchange rate to inflation. Based on these findings, the study recommends a coordinated exchange rate policy framework to enhance credibility and reduce policy conflicts. Exchange rate management should aim at minimizing depreciation and its inflationary pass-through effect. Additionally, structural reforms that reduce import dependence and strengthen domestic production capacity are essential to mitigate external shocks and achieve sustainable price stability.