Time-Varying VAR with Stochastic Volatility and Monetary Policy Dynamics in Nigeria

Bala Abdullahi ()
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Bala Abdullahi: Department of Economic Engineering, Kyushu University, Fukuoka, Japan.

Economics Bulletin, 2016, vol. 36, issue 4, 2237-2249

Abstract: This paper examines the impact of monetary policy on real-GDP, foreign-exchange (FX) reserves and inflation dynamics in Nigeria from 1970Q1 to 2014Q2 by estimating a time-varying parameter-VAR (TVP-VAR) with stochastic volatility model. The model is employed due to its flexibility and its ability to capture both gradual and sudden changes and in dealing with nonlinearities arising from the interaction among macroeconomic variables and associated shocks. In addition, both the coefficients and the variance-covariance matrix of the model's innovations are time varying. The paper finds strong evidence of monetary policy playing a significant role in explaining the dynamics of inflation as the impulse responses for the variables to a monetary policy shock do change significantly over time. However, we observe that monetary policy shocks exert less significant influence than other exogenous non-policy shocks in explaining the dynamics in real-GDP and FX reserves. We also find that the transmission mechanism and the variance of the exogenous shocks for the Nigerian economy are time varying.

Keywords: C11; C32; E52 (search for similar items in EconPapers)
JEL-codes: E3 E5 (search for similar items in EconPapers)
Date: 2016-11-27
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Citations: View citations in EconPapers (1)

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