Exchange Rate Misalignment and Monetary Policy Reaction in Nigeria
Abstract
Objectives: The study examined the effect of the exchange rate misalignment on monetary policy reaction in Nigeria. Specifically, the study examined how the monetary policy rate responds to exchange rate misalignment using monthly data from January 2011 to June 2020. Prior Work: The study augmented the Taylor policy rule by incorporating the exchange rate misalignment variable. Approach: The study employed the generalised method of moments and two-stage least square estimation techniques for its analysis. Results: The results show that the monetary authority targets price stability in formulating monetary policy in Nigeria, with lesser consideration for exchange rate misalignment and output gaps. Implications: This implies that exchange rate misalignment has a negligible effect on the conduct of monetary policy in Nigeria. Instead, monetary policy reacts more to the rate of inflation. Thus, the study recommends that the monetary authority pay considerable attention to exchange rate misalignment and the output gap, given their capacity to induce inflationary or deflationary pressures on the economy. Value: The study underscores the fact that the high output gap and continuous misalignment of the exchange rate to its long-run equilibrium that is not addressed would eventually render the monetary policy thrust ineffective.
References
Adeoye, B. W., & Saibu, O. M. (2014). Monetary policy shocks and exchange rate volatility in Nigeria. Asian Economic and Financial Review, 4(4), 544.
Ajibola, I. O., Udeotte, S. U., Muhammad, R. A., & Anigwe, J. O. (2020). Currency Substitution and Exchange Rate Volatility in Nigeria: An Autoregressive Distributed Lag Approach. CBN Journal of Applied Statistics, 11(2), 1-28
Akosah, N. K., Alagidede, P. & Schaling, E. (2019). Interest Rate and Exchange Rate Volatility Spillovers: Multiscale Perspective of Monetary Policy Transmission in Ghana. Journal of Central Banking Theory and Practice, 1, 135-167.
Akpan, E. O. & Atan, J. A. (2012). Effects of exchange rate movements on economic growth in Nigeria; CBN Journal of Applied Statistics, Vol. 2, No.21.
Ali, A.I., Ajibola, I.O., Omotosho, B.S., & Adeleke, A. (2015). Real Exchange Misalignment and Growth in Nigeria. CBN Journal of Applied Statistics, 6(2), 103-131.
Anyanwu, F., Ananwude, A., & Okoye, N. (2017). Exchange rate policy and Nigeria's economic growth: A granger causality impact assessment. International Journal of Applied Economics, Finance and Accounting, 1(1), 1-13.
Bernanke, B. S., Boivin, J. & Eliasz, P. (2005). Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach. The Quarterly Journal of Economics, 120(1), 387-422.
Chuanglian, C., Shujie, Y. & Jinghua, O. (2016). Exchange rate dynamics in a Taylor rule framework. Journal of International Financial Markets, Institutions, & Money, 46, 158-173.
Clarida, R. (2014). Monetary policy in open economies: practical perspectives for pragmatic central bankers. Journal of Economic Dynamics and Control, 49, 21–30.
Clarida, R., Galí. J. & Gertler, M. (2000). Monetary policy rules and macroeconomic stability: evidence and some theory. Quarterly Journal of Economics, 115(1), 147–180.
Devereux, M., Lane, P. & Xu, J. (2006). Exchange rates and monetary policy in emerging market economies. The Economic Journal, 116(511), 478–506.
Dwivedi, D. N. (2005). Macroeconomics: theory and policy. Tata McGraw-Hill Education.
Dwyer, G. (1993). Rules and discretion in monetary policy. Review - Federal Reserve Bank of St. Louis, 75(3), 3.
Dybowaki, T. P., Hanisch, M. & Kempa, B. (2017). The role of the exchange rate in Canadian monetary policy: evidence from a TVP-BVAR model. Empirical Economics, 55(2), 471-494.
Gagnon, J. & Ihrig, J. (2004). Monetary policy and exchange rate pass-through. International Journal of Finance and Economics, 9(4), 315–338.
Georgiadis, G. & Zhu, F. (2019). Monetary policy spillovers, capital controls and exchange rate flexibility, and the financial channel of exchange rates. European Central Bank Working Paper Series No 2267. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3374168.
Gerlach, S., & Tille, C. (2008). Monetary Policy and Exchange Rates: Theory and Practice. Retrieved from https://www.researchgate.net/publication/228595136_Monetary_Policy_and_Exchange_Rates_Theory_and_Practice.
Imoisi, A. I., Uzomba, P. C. & Olatunji, L. M. (2010), An Analysis of Interest and Exchange Rates Effect on the Nigerian Economy. Asian Economic and Financial Review, 2(6), 648-657.
Iyoha, M. A. (2004). Applied Econometrics (Second Edition). Benin City, Nigeria: Mindex Publishing.
Karrus, G. (1999). Openness and the Effect of Monetary Policy. Journal of International Money, and Finance, 18(1), 13-26.
Keefe, H. G. & Shadmani, H. (2020). Examining the asymmetric monetary policy response to foreign exchange market conditions in emerging and developing economies. International Economics and Economic Policy, 1-28.
Mateane, L. & Proano, C. R. (2018). Does monetary policy react asymmetrically to exchange rate misalignments? Evidence for South Africa. Empirical Economics, 58(4), 1639-1658.
Omojolaibi, J. A., & Gbadebo, A. D. (2014). Foreign exchange intervention and monetary aggregates: Nigerian evidence. International Journal of Economics, Commerce and Management, 2(10), 1-21.
Onuorah, A. C, & Osuji, O. C. (2014). Exchange Rate and the Economic Growth in Nigeria. International Journal of Management Sciences, 2(2), 78–87.
Osigwe, A. C., & Madichie, C. V. (2015). Remittances, Exchange Rate, and Monetary Policy in Nigeria. Global Journal of Management and Business Research, 15(6), 1-6.
Revelli, D. N. P. (2020). The Exchange Rate Pass-Through to Inflation and its Implications for Monetary Policy in Cameroon and Kenya. African Economic Research Consortium, Research Paper 392. Nairobi: AERC.
Svensson, L. (2003). What is wrong with Taylor rules? Using judgment in monetary policy through targeting rules. Journal of Economic Literature, 41(2), 426–477
Taylor, J. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, Elsevier,195-214
Taylor, J. (2000). Using monetary policy rules in emerging market economies. In 75th Anniversary Conference, Stabilisation and Monetary Policy: The International Experience, Bank of Mexico, Mexico City.
Tipoy, C. K., Breitenbach, M. C., & Zerihun, M. F. (2018). Exchange rate misalignment and economic growth: On the possible transmission channels for emerging economies. Cogent Economics and Finance, 6(1), 1476016.
Ufoeze, L. O., Okuma, C. N., Nwakoby, C., & Alajekwu, U. (2018). Effect of foreign exchange rate fluctuations on Nigerian economy. Annals of Spiru Haret University. Economic Series, 18(1), 105-122.
Wei, S. & Kuhelika, D. (2018). Real exchange rate, monetary policy, and the US Economy: Evidence from a Favar Model. Economic Inquiry, 57(2), 552-568.
Ajibola, I. O., Udeotte, S. U., Muhammad, R. A., & Anigwe, J. O. (2020). Currency Substitution and Exchange Rate Volatility in Nigeria: An Autoregressive Distributed Lag Approach. CBN Journal of Applied Statistics, 11(2), 1-28
Akosah, N. K., Alagidede, P. & Schaling, E. (2019). Interest Rate and Exchange Rate Volatility Spillovers: Multiscale Perspective of Monetary Policy Transmission in Ghana. Journal of Central Banking Theory and Practice, 1, 135-167.
Akpan, E. O. & Atan, J. A. (2012). Effects of exchange rate movements on economic growth in Nigeria; CBN Journal of Applied Statistics, Vol. 2, No.21.
Ali, A.I., Ajibola, I.O., Omotosho, B.S., & Adeleke, A. (2015). Real Exchange Misalignment and Growth in Nigeria. CBN Journal of Applied Statistics, 6(2), 103-131.
Anyanwu, F., Ananwude, A., & Okoye, N. (2017). Exchange rate policy and Nigeria's economic growth: A granger causality impact assessment. International Journal of Applied Economics, Finance and Accounting, 1(1), 1-13.
Bernanke, B. S., Boivin, J. & Eliasz, P. (2005). Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach. The Quarterly Journal of Economics, 120(1), 387-422.
Chuanglian, C., Shujie, Y. & Jinghua, O. (2016). Exchange rate dynamics in a Taylor rule framework. Journal of International Financial Markets, Institutions, & Money, 46, 158-173.
Clarida, R. (2014). Monetary policy in open economies: practical perspectives for pragmatic central bankers. Journal of Economic Dynamics and Control, 49, 21–30.
Clarida, R., Galí. J. & Gertler, M. (2000). Monetary policy rules and macroeconomic stability: evidence and some theory. Quarterly Journal of Economics, 115(1), 147–180.
Devereux, M., Lane, P. & Xu, J. (2006). Exchange rates and monetary policy in emerging market economies. The Economic Journal, 116(511), 478–506.
Dwivedi, D. N. (2005). Macroeconomics: theory and policy. Tata McGraw-Hill Education.
Dwyer, G. (1993). Rules and discretion in monetary policy. Review - Federal Reserve Bank of St. Louis, 75(3), 3.
Dybowaki, T. P., Hanisch, M. & Kempa, B. (2017). The role of the exchange rate in Canadian monetary policy: evidence from a TVP-BVAR model. Empirical Economics, 55(2), 471-494.
Gagnon, J. & Ihrig, J. (2004). Monetary policy and exchange rate pass-through. International Journal of Finance and Economics, 9(4), 315–338.
Georgiadis, G. & Zhu, F. (2019). Monetary policy spillovers, capital controls and exchange rate flexibility, and the financial channel of exchange rates. European Central Bank Working Paper Series No 2267. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3374168.
Gerlach, S., & Tille, C. (2008). Monetary Policy and Exchange Rates: Theory and Practice. Retrieved from https://www.researchgate.net/publication/228595136_Monetary_Policy_and_Exchange_Rates_Theory_and_Practice.
Imoisi, A. I., Uzomba, P. C. & Olatunji, L. M. (2010), An Analysis of Interest and Exchange Rates Effect on the Nigerian Economy. Asian Economic and Financial Review, 2(6), 648-657.
Iyoha, M. A. (2004). Applied Econometrics (Second Edition). Benin City, Nigeria: Mindex Publishing.
Karrus, G. (1999). Openness and the Effect of Monetary Policy. Journal of International Money, and Finance, 18(1), 13-26.
Keefe, H. G. & Shadmani, H. (2020). Examining the asymmetric monetary policy response to foreign exchange market conditions in emerging and developing economies. International Economics and Economic Policy, 1-28.
Mateane, L. & Proano, C. R. (2018). Does monetary policy react asymmetrically to exchange rate misalignments? Evidence for South Africa. Empirical Economics, 58(4), 1639-1658.
Omojolaibi, J. A., & Gbadebo, A. D. (2014). Foreign exchange intervention and monetary aggregates: Nigerian evidence. International Journal of Economics, Commerce and Management, 2(10), 1-21.
Onuorah, A. C, & Osuji, O. C. (2014). Exchange Rate and the Economic Growth in Nigeria. International Journal of Management Sciences, 2(2), 78–87.
Osigwe, A. C., & Madichie, C. V. (2015). Remittances, Exchange Rate, and Monetary Policy in Nigeria. Global Journal of Management and Business Research, 15(6), 1-6.
Revelli, D. N. P. (2020). The Exchange Rate Pass-Through to Inflation and its Implications for Monetary Policy in Cameroon and Kenya. African Economic Research Consortium, Research Paper 392. Nairobi: AERC.
Svensson, L. (2003). What is wrong with Taylor rules? Using judgment in monetary policy through targeting rules. Journal of Economic Literature, 41(2), 426–477
Taylor, J. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, Elsevier,195-214
Taylor, J. (2000). Using monetary policy rules in emerging market economies. In 75th Anniversary Conference, Stabilisation and Monetary Policy: The International Experience, Bank of Mexico, Mexico City.
Tipoy, C. K., Breitenbach, M. C., & Zerihun, M. F. (2018). Exchange rate misalignment and economic growth: On the possible transmission channels for emerging economies. Cogent Economics and Finance, 6(1), 1476016.
Ufoeze, L. O., Okuma, C. N., Nwakoby, C., & Alajekwu, U. (2018). Effect of foreign exchange rate fluctuations on Nigerian economy. Annals of Spiru Haret University. Economic Series, 18(1), 105-122.
Wei, S. & Kuhelika, D. (2018). Real exchange rate, monetary policy, and the US Economy: Evidence from a Favar Model. Economic Inquiry, 57(2), 552-568.
Downloads
Published
2022-02-07
How to Cite
Ige, O., Adedokun, A., & Otonne, A. (2022). Exchange Rate Misalignment and Monetary Policy Reaction in Nigeria: Array. Acta Universitatis Danubius. Œconomica, 18(1). Retrieved from https://dj.univ-danubius.ro/index.php/AUDOE/article/view/1535
Issue
Section
Economic Development, Technological Change, and Growth
License
The author fully assumes the content originality and the holograph signature makes him responsible in case of trial.
