Financial Statistical Journal (2023) Volume 6 Issue 2 doi: 10.24294/fsj.v6i2.5736 1 Original Research Article Inflation-balance of trade nexus in Nigeria: The impact of exchange rate pass-through Josephine Obiageli Opene-Terry, Benedict Ikemefuna Uzoechina * , Kenechukwu Okezie Okeyika, Ngozi Florence Ezenwobi, Abimbola A. Oladipo, Vincent Chuks Okafor Department of Economics, Nnamdi Azikiwe University, Awka 420102, Nigeria * Corresponding author: Benedict Ikemefuna Uzoechina, ib.uzoechina@unizik.edu.ng ABSTRACT The relationship between exchange rate (EXR) and foreign trade (FT) in Nigeria has been a contentious issue since Nigeria’s independence in 1960. This study investigated the link between exchange rate and foreign trade through the prism of exchange rate pass-through (EXRPT) to domestic prices, utilizing monthly data from 2011 to 2022. The study was built on two models—the base and main models respectively. Employing the VAR technique and its Vector Error Correction Model (VECM) extension, the paper found that EXRPT to consumer prices is incomplete in the short run but its effect was found to be higher on imports than on consumer prices. It follows that the impact of EXRPT diminishes along the price chain. Results from the main model indicate that the impact of domestic prices on balance of trade was found to be negative with elasticity of −0.437541and is also statistically significant, thus, confirming the Marshal-Lenner condition. The Marshal-Lenner condition and findings of this study provide evidence that depreciating exchange rate is not recommended for an import inelastic country like Nigeria. Keywords: exchange rate; inflation; foreign trade; depreciation; imports JEL Classification: F31; E31; F1; F14 1. Introduction Since no country exists in isolation, foreign trade is, therefore, important for survival of most economies. Not only does it aid interactions, promote economic growth, employment, exchange and market expansion, it also enhances economic outcomes or fortunes for countries of the world [1] . The discovery of oil in the early 1970’s changed the narrative for Nigeria who engaged in exportation of crude oil as her major source of earning. This huge revenue inflow became overwhelming for Nigeria who had no plans of how to reinvest the excess revenue but instead resorted to importing everything. Unfortunately, when the windfall from oil ended around 1977, Nigeria had become an import-oriented country and has remained so up till today. There are basic factors influencing foreign trade amongst nations especially that between Nigeria and other countries. They include inflation, national income, world commodity prices, volume of export and import amongst others. In Nigeria, inflation has been a very strong determinant of our exchange rate since the SAP period owing to the interaction between the domestic economy and the external economy. This interaction can affect the volume of export and import and subsequently our balance of trade. More so, in terms of world ARTICLE INFO Received: 9 April 2024 Accepted: 12 June 2024 Available online: 17 July 2024 COPYRIGHT Copyright © 2024 by author(s). Financial Statistical Journal is published by EnPress Publisher, LLC. This work is licensed under the Creative Commons Attribution- NonCommercial 4.0 International License (CC BY-NC 4.0). https://creativecommons.org/licenses/by- nc/4.0/