Journal of Contemporary Research in Business, Economics and Finance ISSN: 2641-0265 Vol. 3, No. 1, pp. 26-38. 2021 Publisher: Learning Gate DOI: 10.33094/26410265.2021.31.26.38 © 2021 by the authors; licensee Learning Gate © 2021 by the authors; licensee Learning Gate Impact of Exchange Rate Volatility on Inflation in Nigeria Musa, Nuhu Department of Economics, Kogi State University, Anyigba, Kogi, Nigeria. Email: musanuhuadams@gmail.com Received: 21 October 2020; Revised: 10 February 2021; Accepted: 26 February 2021; Published: 12 March 2021 Abstract: This study examined the effect of exchange rate volatility on inflation in Nigeria using annual time series data covering the period 1986-2019. To achieve this objective, the study employed the generalized autoregressive conditional heteroskedasticity (GARCH) and vector error correction model (VECM) to ascertain the long-run impact of exchange rate volatility on inflation . The study used consumer price index as a proxy for inflation being the dependent variable while nominal exchange rate (NER), money supply (MS) import (IMP) and export (EPT) were used as the independent variables. The results of stationarity test indicated that the variables have mixed order of integration and bounds test for co-integration confirmed the existence of a long- run relationship among the variables. Findings showed that money supply (MS) and nominal exchange rate(NER) had positive and significant effect on consumer price index, meaning that inflation in Nigeria is caused by exchange rate fluctuations as well as increase in money supply. Based on the findings, the study recommended that growth of money supply should be controlled by the central bank in order to reduce inflation to the barest minimum. Keywords: Exchange rate, Volatility, Money supply, Inflation, VECM, Consumer price index. 1. Introduction One of the most serious challenges facing Nigeria and most developing economies is inflationary pressure coupled with exchange rate volatility. The adverse consequences inflationary pressure arising from exchange rate volatility have been a serious concern for economists and policy makers. In Nigeria, the Central Bank is saddled with the responsibility of maintaining stable exchange rate and price stability in the economy and, this is done by ensuring that the rate of inflation is kept within a certain bound. Monetary policy is one of the instruments of economic stabilization. The main objectives of monetary policy in Nigeria are to preserve the value of the Naira and to maintain enough foreign exchange reserves (Oleka & Okolie, 2016). In Nigeria, the central bank maintains the stability of the Naira exchange rate in order to achieve its objective of maintaining price stability because domestic prices (inflation) are very responsive to exchange rate fluctuations. According to Ubi, Effiom, and Eyo (2012) in countries where exchange rate volatility tend to have adverse effects on inflationary pressure, more stable exchange rate through central bank intervention in the foreign exchange market is required in order to stabilize the economy. The Central bank uses its monetary policy such as monetary policy rate, interest rate, open market operation, and other weapons to stabilize the economy with a view to achieving some specified macroeconomic policy objectives and to counter undesirable trends in the economy such as unemployment, inflationary pressures, sluggish economic growth and external sector instability. Monetary policy therefore, is a package of actions carefully designed to manage the growth, value and cost of money with the broad objective of regulating economic conditions and activities during a given