This study investigates the dynamic interactions among exchange rate stability (LERS), inflation rate (IR), and money supply growth (MSG) in Nigeria from 1988 to 2023 using Autoregressive Distributed Lag (ARDL) and Granger causality techniques. Key statistical findings reveal bidirectional causal relationships: IR Granger-causes LERS (F-statistic = 4.9843, p = 0.0138), indicating that inflationary pressures undermine exchange rate stability, while LERS Granger-causes MSG (F-statistic = 3.5503, p = 0.0418), suggesting reactive monetary policy adjustments to exchange rate fluctuations. The ARDL model demonstrates a strong fit (R² = 0.9609), with a slow error correction rate (-0.1165), implying that 11.65% of disequilibrium corrects annually, reflecting structural inefficiencies. Unit root tests confirm stationarity at first difference for IR and LERS (I(1)) and at level for MSG (I(0)). Despite high explanatory power, the bounds test (F-statistic = 2.063) rejects long-run cointegration, highlighting transient relationships—contrary to regional studies but aligned with Nigeria’s unique policy dynamics. Diagnostic tests confirm model robustness: no serial correlation (Breusch-Godfrey p > 0.05), homoskedastic residuals (Breusch-Pagan p > 0.05), and parameter stability (CUSUM within 5% bounds). Correlation analysis shows moderate inverse links between IR and LERS (-0.5408) and LERS-MSG (-0.3573), with weak IR-MSG association (0.1380). These findings underscore Nigeria’s vulnerability to short-term inflationary shocks and reactive monetary policies. The study advocates for proactive inflation targeting anchored on forward-looking indicators and rules-based monetary frameworks to align money supply with long-term stability, mitigating exchange rate fluctuations. Policymakers must prioritise structural reforms to address inefficiencies and enhance policy coordination for sustained macroeconomic resilience.
Keywords: Inflation Rate, inflation dynamics, monetary policy effectiveness, money supply growth and exchange rate stability.
