Foreign Exchange Rate and Purchasing Power Parity: A Review of Literature

Abstract

With a focus on Nigeria and comparative global evidence, this study examines the literature on the connection between Foreign Exchange Rates and Purchasing Power Parity (PPP). Analyzing how changes in exchange rates affect PPP while taking inflation, economic stability, and price level adjustments into account is the goal. Nine international papers and twelve Nigerian studies were chosen using a PRISMA-style framework. According to the review, some studies support PPP validity over long time horizons, while others highlight variations related to inflation shocks, fiscal imbalances, and dependency. Gaps in methodological rigor are found in the review, especially in the restricted application of sophisticated econometric approaches such panel ARDL models and nonlinear PPP tests. The policy implications point to Nigeria's exchange rate control and inflation targeting being strengthened. A research agenda that emphasizes methodological innovation and wider coverage of moderating variables is presented in the paper's conclusion.