Effects of Stagflation and Exchange Rate Fluctuations on Economic Growth in Nigeria

The impact of stagflation and exchange rate fluctuations on economic growth in Nigeria from 1991 to 2023 is examined. Data obtained from the World Bank include GDP growth rate, inflation (Consumer Price Index), exchange rate (Real Effective Exchange Rate), and unemployment rate. Stagflation is defined both as a multiplicative interaction term (INF × Ue) and as a composite threshold dummy variable (D_STAG = 1 when INF > 10%, Ue > 5%, and GDP growth < 2%), with the latter included for robustness. The analysis utilizes the Autoregressive Distributed Lag (ARDL) bounds-testing framework and the associated Error Correction Model (ECM). Long-run findings indicate that exchange rate volatility negatively affects economic growth (β = −0.0243, p = 0.0496), whereas inflation, unemployment, and their interaction are statistically insignificant in the long run. In the short run, changes in inflation (−0.3548), unemployment (−32.5494), and the stagflation interaction (0.0822) have significant effects on growth, whereas the exchange rate is insignificant. The reversal in the sign of the stagflation coefficient across time horizons is attributed to nominal rigidities in the short run and structural adjustment dynamics in the long run. Diagnostic tests confirm the absence of serial correlation, heteroskedasticity, and functional form misspecification. Exchange rate instability is identified as the dominant long-run constraint on Nigerian economic growth, while stagflation effects are concentrated in the short run.

Exchange rate fluctuations; Economic growth; Inflation; Stagflation

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