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 on
the final consumption expenditure of households in Nigeria from 1981 to 2023. Annual time series
data were sourced from the Central Bank of Nigeria Statistical Bulletin and the World Development
Indicators. Household Consumption Expenditure (HCER) was used as the dependent variable.
Exchange Rate (EXR), Trade Openness (TOP), Inflation (INF) and Interest Rate (INR) were
captured as explanatory variables of the study. The paper employed Autoregressive Distributed
Lag (ARDL) and other estimation techniques. Other tests demonstrated in this paper included the
unit root test, descriptive statistics, lag length, the F-Bound Test, and the diagnostic Test, and
collectively established the validity and reliability of the model used. All the variables were
integrated 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 had
significant negative impacts on household consumption expenditure in the long run, with only
exchange rate and inflation significant in the short run. The study concluded that macroeconomic
stability is crucial for sustaining household welfare and recommends that policymakers pursue
exchange rate stabilization, inflation control, trade policy reforms, and interest rate adjustments to
support household consumption expenditure.