Returns and volatility spillover between food prices and exchange rate in Nigeria

Purpose - Empirical studies have documented the linkage between exchange rate movement and food prices. However, the purpose of this study is to investigate the degree and direction of returns and volatility spillover transmission between exchange rate and domestic food prices in Nigeria. Design/methodology/approach - The study uses weekly data from January 2010 to January 2019. Also, the study adopts the improved Diebold and Yilmaz (2012) approach to evaluate the return and volatility spillover between food price and naira to dollar exchange rate. The study also account for 2016 exchange rate crash in the interconnectedness between food prices and naira to dollar exchange rate. Findings - The paper finds evidence of directional interdependence among the considered food prices and exchange rate based on the obtained spillover indexes. In addition, exchange rate returns and volatility transmission to food prices is more than it receives, particularly after the exchange rate crash. Research limitations/implications - The high consumption of staple foods requires policies on price stabilisation such as massive investment in local production and reduction in import dependence, in order to cushion the effects of exchange rate depreciation on domestic prices of food. Originality/value - This study is the first empirical study to investigate the interconnectedness between exchange rate and domestic food prices for a food import–dependent developing country using the Diebold and Yilmaz approach.