Exchange Rate Depreciation, Budget Deficit and Inflation - the Nigerian Experience

"This study examined the quantitative effects of exchange rate depreciation on inflation, government revenues and expenditures, and money supply in Nigeria. Our objective was achieved through the use of a macroeconometric model that captures the key aspects of the linkages between the above variables. In the empirical estimates of the structural equations, we drew on recent developments on cointegration and error correction model which are rapidly gaining popularity among economist and econometricians.Evidence from trend analysis suggests that domestic money supply, real output, the shadow price of exchange rate — the parallel market exchange rate — and,more recently, official exchange rate, cannot be ignored in evaluating the proximate causes of inflation in Nigeria. With particular reference to exchange rate, graphical representation reveals that the parallel market exchange rate appears to correlate with inflation more when compared with the official rate."