Can Interactions between Financing and Investment Activities Have Dissimilar Effects on Inflation and Exchange Rates?

Abstract

type="main" xml:lang="en"> I find that policies targeted at stabilizing exchange rates within the context of Nigeria's managed floating exchange rate regime have not allowed for direct inflation targeting. In spite of this constraint, which is predicted by and consistent with macroeconomic theory, however, interactions between financing and investment activities within the Nigerian economy have resulted in a decrease in inflation levels that is traceable to price substitution strategies facilitated by import-related activities. This decrease in inflation levels has been realized in spite of the fact that changes in the demand for investment financing have dissimilar effects on future realizations of inflation and exchange rates; that is, exacerbate policy constraints. My findings provide evidence that while the adoption of managed floating or hybrid exchange rate regimes renders direct inflation targeting difficult, the combination of exchange rate stability, price stability, and lower inflation levels (relative to some origin point) remains achievable in such economies.