Abstract:

The paper focused on identifying major factors that cause inflation in Nigeria using secondary data for 1981-2016. It specifically examined how the dynamics of key economic fundamentals like external debt, exchange rate, output growth rate, interest rate, fiscal deficits and money supply explain inflationary trend in Nigeria. Based on the result of the unit root test, the econometric technique of ordinary least squares was adopted in the study. The study produced strong empirical support for positive effect of exchange rate, fiscal deficits and money supply on inflation. However, there is no evidence from the study that output growth rate, external debt, and interest rate cause significant changes in inflation rate in Nigeria. Within the scope of our study, there is substantial evidence to conclude that inflation is driven by exchange rate dynamics, fiscal deficit and money supply.