Monetary Policy Shocks and Exchange Rate Volatility in Nigeria

Babatunde Wasiu Adeoye and Olufemi Saibu

Asian Economic and Financial Review, 2014, vol. 4, issue 4, 544-562

Abstract: This paper analysed the effects of monetary policy shocks using changes in various monetary policy instruments on exchange rate volatility in Nigeria. This paper investigates the relationship between exchange rate volatility and monetary policy shocks in Nigeria. The paper applies the classical ordinary least square to examine the short-run monetary policy determinants of exchange rate volatility in Nigeria. Also, the error correction mechanism model was estimated after establishing the long-run interaction among set of incorporated variables using the Engle-Granger approach. The results from the paper show that both real and nominal exchange rates in Nigeria have been unstable during the period under review. In the short, the variation in the monetary policy variable explains the movement/behaviour of exchange rate through a self-correcting mechanism process with little or no intervention from the monetary authority (CBN). In addition, the results from the causality tests between the exchange rate volatility and monetary policy variables showed that there is a causal link between the past values of monetary policy variables and the exchange rate. This is obvious in the case of the past value of the interest rates. Such that, a change in the level of previous values of monetary policy variables causes exchange rate volatility. Finally, the paper reiterated and concluded that inflation rate, reserves, interest rate and money supply depreciate and cause volatility in nominal exchange rate which further reinforce other findings that monetary policy is crucial to exchange rate management in Nigeria.

Keywords: Monetary policy; Exchange rate Volatility; Policy shocks; Central banking (search for similar items in EconPapers)
Date: 2014
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