Inflation Adjustment Dynamics Under Fixed and Managed Flexible Exchange Rate Regimes in Nigeria: Nonlinear Autoregressive DistributedLag (Nardl) Models

Abstract

This study investigates the dynamics of inflation adjustment under fixed and managed flexible exchange rate regimes in Nigeria. Using quarterly secondary data, the analysis spans 1981–1986 for the fixed exchange rate period and 1987–2023 for the managed flexible exchange rate period. The dependent variable is the consumer price index (CPI), while the independent variables include the nominal exchange rate (NEXRT), fixed and managed flexible exchange rates, and real gross domestic product (RGDP). Economic challenges, such as the Central Bank of Nigeria's (CBN) inability to maintain a fixed exchange rate due to declining foreign exchange reserves and rising demand for dollars, prompted the shift to a managed exchange rate regime. The ADF and PP unit root tests reveal that CPI is stationary at level (I(0)), while NEXRT and RGDP are stationary after first differencing (I(1)). The ARDL bounds test confirms a long-run relationship among the variables, indicating co-integration. Employing the NARDL model, the findings reveal that under the fixed exchange rate regime, short-run disequilibria are corrected by 53% in the long run, with statistical significance (p = 0.0008). For the managed flexible exchange rate regime, deviations are corrected by 85% in the long run, also statistically significant (p = 0.0000). The study recommends that monetary authorities enhance dollar availability to support policy objectives and curb inflationary pressures.