Department of Economics

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Browsing Department of Economics by Author "Ojo, Felix Ayoola"

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    Exchange Rate Fluctuations and Inflation Rates in West Africa
    (2023) Ojo, Felix Ayoola
    In West African countries, the economic instability caused by inflationary pressure has prompted some concerns about the primary reasons driving inflation rates. This study examined the relationship between exchange rate fluctuations and inflation rates in 15 West African countries in the short run and long run covering a 31-year period from 1990 to 2020, with emphasis on differential effects in Anglophone and Francophone West African countries. The scope of the study is divided in geographical, contents and units of analysis. The Purchasing Power Parity (PPP) framework formed the basis for this study. The study adopted the monetarist and classical model of determinants of inflation which was remodified by incorporating inflation rate (INF), exchange rate (EXR), exchange rate volatility (EXRv), monetary policy variables, and fiscal policy variables. Panel data for all the variables were obtained from World Bank Development Indicators for the period under review. Linear Autoregressive Distributed Lag (ARDL) and non-linear Autoregressive Distributed Lag (NARDL) estimation techniques were used for result reliability. Volatility was generated through ARCH model while CUSUM test was carried out to check for the stability of the series. The ARDL model results showed that the previous inflation rate contributed about 7% to the recent price instability in the region. It was further revealed that exchange rate fluctuations positively influenced inflation rates by about 4% in Anglophone countries in the short run with greater influence in the Francophone countries. Meanwhile, the results from non-linear Autoregressive Distributed Lag (NARDL) model revealed that exchange rate depreciation contributed not less than 2% to inflation rate in the long run and was statistically significant. The findings from Anglophone countries demonstrated that the policy of the monetary authorities to increase the quantity of money in circulation, if well managed, will not result in high rate of inflation in West African countries. Findings from Francophone countries showed that money supply, economic growth rate, and public debt did not contribute to the inflationary trends in the region. However, producer price index, the degree of trade openness, exchange rate and value added triggered inflation rates in the Francophone countries within the period under review. According to the findings, exchange rate fluctuations contributed to inflationary pressures in the West African region. The study recommended that floating exchange rate regime should be maintained and supported with high productivity of farm produce for exports without damaging the consumption level of the domestic economy; and that monetary authorities in this region should employ contractionary monetary policy so as to reduce the stock of money in circulation. Monetary authorities in the region should also maintain single-digit inflation rate for price stability to be maintained. Single currency should also be adopted among the member states so as to stabilize cross-border transactions, and finally, concessions in form of subsidies should be given to domestic industries so as to enhance productivity which will reduce the prices of goods and services and thereby reduce inflation to the barest minimum.