THE IMPACT OF EXCHANGE RATES ON FINAL CONSUMPTION EXPENDITURE OF HOUSEHOLDS IN NIGERIA: AN EMPIRICAL ANALYSIS

Abstract

The primary motive of this paper was to investigate the impact of exchange rates onthe final consumption expenditure of households in Nigeria from 1981 to 2023. Annual time seriesdata were sourced from the Central Bank of Nigeria Statistical Bulletin and the World DevelopmentIndicators. Household Consumption Expenditure (HCER) was used as the dependent variable.Exchange Rate (EXR), Trade Openness (TOP), Inflation (INF) and Interest Rate (INR) werecaptured as explanatory variables of the study. The paper employed Autoregressive DistributedLag (ARDL) and other estimation techniques. Other tests demonstrated in this paper included theunit root test, descriptive statistics, lag length, the F-Bound Test, and the diagnostic Test, andcollectively established the validity and reliability of the model used. All the variables wereintegrated of the same order 1(1) except for Household Consumption Expenditure and Inflation,which were integrated of order 1(0). The paper was anchored on the Purchasing Power Parity (PPP)theory. The results revealed that exchange rate, inflation, trade openness, and interest rate hadsignificant negative impacts on household consumption expenditure in the long run, with onlyexchange rate and inflation significant in the short run. The study concluded that macroeconomicstability is crucial for sustaining household welfare and recommends that policymakers pursueexchange rate stabilization, inflation control, trade policy reforms, and interest rate adjustments tosupport household consumption expenditure.