Forecasting inflation and exchange rates under financial uncertainty: New evidence from Nigeria

Abstract

The increasing dealing of professional exchange rate forecaster in the financial market exposes the decision of the financial investor to financial uncertainty. Thus, this paper examines the impact of financial uncertainty on professional exchange rate forecast in Nigeria using a monthly data from the period January, 2006 to June, 2022. The paper considers monetary policy and financial uncertainty to account for different dimensions of uncertainty. Based on the Bayesian liner regression utilized, it is observed that stock market activities proxied by stock price index, improves economic performance in Nigeria. The forecasting performance is evaluated by comparing two of the most common measures to judge forecasting accuracy, Root Mean Square Errors (RMSE) and Mean Absolute Error (MAE). The result of the RSME, MAE and MAPE indicate a good accurate prediction of the model, hence, the model is perfect and no error. Therefore, the model has a good forecasting performance. However, interest rate and stock price are predicted to fall. The study concludes that past values of inflation rate, interest rate and stock market price are significant determinant for forecasting professional exchange rate in Nigeria. Policy implication from this result is that government should be prepared to combat high rate of inflation because of its negative impact on the welfare of the populace. The investors can take advantage of future low interest rate and stock price by planning to expand their businesses. Since stock market activities improves economic performance, increasing investment will lead to increase in demand and increase in profit. Since the exchange rate is predictable, the professionals will also take advantage of this to increase their profits.