An Asymmetrical Approach to Exchange Rates, Inflation Uncertainty, and Savings in Nigeria
Abstract
This study uses the Nonlinear Autoregressive Distributed Lag (NARDL) model to examine the asymmetric effects of inflation uncertainty and exchange rate volatility on savings behaviour in Nigeria. The findings show that savings are adversely affected by positive cumulative changes in inflation uncertainty, as measured by the GARCH-based conditional variance of inflation. Households are forced to devote more resources to immediate spending due to rising inflation uncertainty, especially during periods of food scarcity and insecurity. However, because families continue to have doubts about long-term economic stability, a decrease in inflation concerns does not immediately lead to increased savings. Additionally, because consumers anticipate further currency depreciation, past currency depreciation has a long-lasting, detrimental impact on savings. These results provide insights into the intricate relationships among exchange rate volatility, inflation uncertainty, and savings behaviour in Nigeria when examined within the frameworks of Precautionary Savings Theory, the Life Cycle Hypothesis, and the Permanent Income Hypothesis.