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EXCHANGE RATE FLUCTUATION AND INFLATION TARGETING IN AN OPEN ECONOMY: ECONOMETRIC APPROACH
ABSTRACT: The study empirically evaluates the impact of exchange rate fluctuation on inflation targeting on the Nigerian economy. The study adopted annual times series data spanning a period of 43 years (1970 to 2012). The finding of our results suggests that the theoretical modelling requirements for all the variables used in the regression satisfy the statistical requirements that determine the choice of the statistical model. The result from the estimated long–run model shows that all the variables [interest rate (INTR) and exchange rate (EXCHR)] were statistically significant. The INTR positively influence the growth of INFR in the Nigerian economy while EXCHR negatively impact on the economy. Therefore, more concerted effort should employed by the federal government to stabilize the exchange rate as this will in turn lead to a positive impact of EXCHR on the economy. This will boost the country’s export as well as reduce import their by reduction inflation in the economy. In the light of the foregoing, we state that the financial sector does not operate in ambiance but in a macroeconomic environment. It is therefore necessary that the environment should be one that is amenable to contemporary market situations. We therefore recommend that in order to curb inflation through inflation targeting, efforts must be made towards gathering financial data at a more precise level such that majority of financial transactions is captured in the database. Also, lending rates in Nigeria should be made flexible while other means should be employed towards raising the value of the naira as this will reduce greatly the inflation rate in the country.
KEYWORDS: Exchange Rate Volatility, Inflation Targeting, Open Economy, Economic Growth