The Effect of Double-Digit Inflation and Volatile Exchange Rates on Economic Growth in Nigeria, 2001–2025: An ARDL Bounds-Testing and Threshold-Regression Analysis of the Inflation–Exchange Rate–Growth Nexus

Abstract

This study examines the effect of double-digit inflation and volatile exchange rates on economic growth in Nigeria over the period 2001 to 2025, a twenty-five-year horizon spanning the oil boom, the 2008–2009 global financial crisis, the 2016 and 2020 recessions, and the 2023 foreign-exchange unification reform. The broad objective is to establish the direction, magnitude, and statistical significance of the relationship between these two macroeconomic variables, individually and jointly, and Nigeria's real output growth. Guided by the quantity theory of money, the structuralist theory of inflation, the purchasing power parity and monetary approaches to exchange-rate determination, and the Fischer–Khan–Senhadji threshold theory of inflation and growth, the study formulates and tests three null hypotheses using annual secondary time-series data compiled from the Central Bank of Nigeria, the National Bureau of Statistics, the World Bank, and the International Monetary Fund. Augmented Dickey-Fuller unit-root tests confirm that all three focal series are integrated of order one, I(1); an Autoregressive Distributed Lag (ARDL) bounds-testing procedure (Pesaran, Shin, & Smith, 2001) and a Hansen-type threshold regression (Hansen, 2000) are therefore used in preference to a levels-OLS specification. The bounds test finds no statistically robust evidence of a stable linear long-run relationship among growth, inflation, and the exchange rate (F = 2.686, below the 10 percent critical lower bound of 3.17) — a null result interpreted as consistent with, rather than contrary to, the non-linear threshold theory motivating the study. The threshold regression estimates a fit-minimising inflation threshold of 15.44 percent (sup-F = 5.437, indicative asymptotic p = 0.013), reported alongside an explicit discussion of its small-sample fragility (only eight observations in the high-inflation regime) and its divergence from the 9 percent threshold independently estimated for Nigeria by Oyadeyi, Osinubi, Simatele, and Oyadeyi (2025). Exchange-rate depreciation is negative and statistically significant across every specification tested, making it the most robust finding of the study. Every Nigeria-specific secondary source cited was checked against publicly available journal-indexing information, and sources that could not be confirmed as Scopus-indexed or otherwise independently verifiable were excluded rather than retained for convenience. The study concludes that Nigeria's growth constraint since 2001 has been driven predominantly by exchange-rate instability, with inflation's role being real but harder to establish with precision using an annual, single-equation approach, and it recommends a coordinated monetary–fiscal–structural policy response together with bootstrap-based re-estimation of the threshold effect in future work.