Investigating the Relationship between Currency Substitution, Exchange Rate and Inflation in Nigeria: An Autoregressive Distributed Lag (ARDL) Approach.

Currency substitution is a widely spread phenomenon in developing countries with high level vagueness of its concept and causes. Therefore, this paper goes all out to examine the relationship that exists between currency substitution and some macroeconomic variables such as exchange rate, inflation and interest rate in Nigeria using Autoregressive Distributed Lag (ARDL) techniques over a period of 1970 – 2012. The result of the bound test procedure and other tools employed confirm that there is a stable and long-run relationship between currency substitution and the macroeconomic variables under consideration. The CUSUM and CUSUMSQ when also incorporated support these findings for the period. It is therefore suggest that effective and efficient policy control measure should be develop and implement to normalize exchange rate, inflation and interest rate.