THRESHOLD EFFECTS OF PARALLEL CURRENCY MARKET PREMIUMS ON INFLATION IN NIGERIAN

Abstract

This study investigates the threshold level of the Parallel Currency Market Premium (PREM) on inflation in Nigeria. Using data from the World Bank’s Development Indicators and the Central Bank of Nigeria’s Statistical Bulletin covering the period of 1986 to 2022. The Threshold Model is employed to analyze the relationship between PREM and key macroeconomic factors such as inflation and interest rate. The results obtained reveal threshold values of 41% for inflation rate and 26% for interest rate, beyond which Nigerian inflation and interest rates are adversely affected. The study concludes that gradually liberalising the Nigerian foreign exchange in the official market and unifying the currency exchange rates can mitigate inflationary pressures by eliminating the PREM.