Impact of Exchange Rate Regimes on Inflation in Nigeria
The study empirically investigates the impact of exchange rate regimes on inflation in Nigeria from 1981Q1 to 2018Q4, 152 observations. The variables used in the study were Consumer Price Index (cpi) that captured Inflation, Normal Exchange Rate (nexrt), Money Supply Per Real Gross Domestic Product (M2/rgdp), Dummy (D1) Captured the shift from fixed (Pre-SAP) to flexible (Post-SAP) Exchange Rate Regimes, Real Gross Domestic Product (rgdp), and Real Interest Rate (rintrt). The variables were tested for the unit root test, both the ADF and PP unit root tests established that all the variables were stationary at both level (I(0)) and after first differencing (I(1)). The ARDL Bounds test was employed to determine the existence of long run relationship among the variables, it implies that there exist a long run relationship among the variables, they were co-integrated. ARDL was employed; the results indicate that current exchange rate has a positive and significant on inflation. Dummy co-efficient has a negative (-20.10) and significant (Prob. 0.000000) at 5% relationship with inflation in Nigeria. This suggests that the floating exchange rate regime policy is preferable for controlling rising inflation compared to the fixed exchange rate. Finds shows that impact of flexible exchange rate regime (post-SAP) has positive and more significant in affecting inflation than fixed exchange rate regime in Nigeria. The study recommends: that government of Nigeria must continue to ensure that it achieves flexible exchange rate stability in order to stem inflationary.
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