The Impact of Fixed and Floating Foreign Exchange Rates on Inflation Rates in Nigeria: Statistical Evidence

Most statistical applications to modeling and forecasting macroeconomic variables do attempt to provide the best model that explains the relationship between these variables. In this study, application is performed with the view to provide explanation to the impacts of the stable (fixed) and also unstable (floating) foreign exchange (Forex) market on inflation rate in Nigeria. The stable Forex is represented by a stationary process while the unstable Forex market is represented by non-stationary process. Using the Box-Jenkins Seasonal Autoregressive Integrated Moving Average with exogenous variable (SARIMAX) approach, the results showed that fixed exchange rate market has the tendency to stabilize inflation in a developing economy as there would be a reduction of approximately 50% in inflation rate in Nigeria when Forex is regulated, and that macroeconomic variables are suitably predicted when they are generated through a stationary process.