DYNAMIC INTERACTIONS AMONG EXCHANGE RATE, PERFORMANCE OF MANUFACTURING SECTOR AND INFLATION IN NIGERIA: AN ARDL APPROACH

Abstract

The manufacturing sector is the hub for the transformation of raw materials to finished or semi-finished goods. By engaging in both international and domestic markets, macro-prices are likely going to interplay with the behavior of the sector. This study determines the direction of causality among exchange rate, inflation and manufacturing sector (MS) performance. It further analyzes the effect of exchange rate on inflation and MS performance in Nigeria. Secondary and annual time series data that covered 1981 to 2018 are sourced from World Development Indicator (WDI) published by World Bank Organization. This study employed the Augmented Dickey Fuller (ADF), Philip-Perron (PP), Johanson cointegration, VEC multivariate Granger causality/Exogeneity and Autoregressive Distributed Lags (ARDL) bounds tests. The findings revealed that a long run relationship exists among MS performance, exchange rate and inflation, but only inflation has a statistically significant positive effect on MS performance in the long run. Also, a unidirectional causality runs from exchange rate to MS performance and from inflation to MS performance, while bidirectional causality runs between exchange rate and inflation. In the short run, exchange rate has a negative effect on MS performance in the current year, but positive effect in the previous year. The effect of inflation on MS performance is positive in both the short and long run. This study recommends that both exchange rate and inflation should be regulated by the monetary authority through appropriate monetary policies like low rate of interest and rejection of further currency devaluation measures to promote the performance of the MS without jeopardizing the welfare of the citizenry in Nigeria, since both high exchange and inflation rates are characterized by adverse welfare effects.

Keywords

• exchange rate
• inflation
• Manufacturing