Vol. 5, Issue 9, Part E (2019)

Abstract
This study examines the effect of exchange rate on inflation rate in Nigeria during the period of (1986-2018). The argument is that fluctuation in exchange rate adversely affects inflation in Nigeria. This is because Nigeria economy is highly dependent on import of inputs and capital goods. These are paid for in foreign exchange whose rate of exchange is unstable. Thus, this apparent fluctuation is bound to adversely affect activities in the sector that is dependent on external sources for its productive inputs. The methodology adopted for the study is empirical. The objectives of this study are; to evaluate the effect of exchange rate on interest rate in Nigeria, to evaluate the effect of exchange rate on real output in Nigeria, and to find the relationship between foreign exchange rate and inflation in Nigeria. The econometric tool of regression was used for the analysis. In the model that was used, gross domestic product growth, exchange rate, and interest rate were used as the explanatory variables. The result of the regression analysis shows that coefficients of the variables carried positive and negative signs. The study actually shows adverse and is all statistically significant in the final analysis. Some recommendations for policy were made based on the findings. Amongst others is the need to strengthen the link for inflation in Nigeria through local sourcing of raw materials thereby, reducing the reliance of the sector on import of inputs to reasonable level.