Exchange Rate Dynamics and Household Consumption in Nigeria

Abstract

This study investigated the impact of exchange rate dynamics and final household consumption in Nigeria from 1981-2021. This period covered the most turbulent exchange rate dynamics in Nigeria as well as the periods of two economic recessions within a decade. Theoretical framework underpinning the study was the life cycle hypothesis (LCH) and purchasing power parity (PPP). Final household consumption, disposable income, inflation, nominal exchange rate, nominal interest rate and trade openness were used for the analysis. The collected data were analyzed using both the autoregressive distributed lag (ARDL) and structural vector autoregressive (SVAR) techniques. The findings of the study revealed that nominal exchange rate through transmission channel of inflation and trade openness had long run negative and positive impacts on final household consumption in Nigeria respectively. The study concludes that since the factors causing exchange rate dynamics may be difficult to control, attention should be on curbing its impacts through its transmission channels.  Based on the findings, the study recommends an increase in the use of fiscal policy to curb the impact of inflation and to spur the economy into production for export.