The Mundell-Fleming Trilemma: Implications for the CBN and the financial markets

Tonprebofa Okotori and Peter Ayunku

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper using monthly data for the period 1981-2018, we adopted VARmethodology to show the nexus of foreign direct investment(FDI), the exchange rate (EXR), and net exports in order to reveal the effect of one variable on the other. Granger causality test, impulse response functions as well as block wald/exogeneity were used to test the given hypothesis. The results show that FDI did not granger cause exchange rate (EXR), but exchange rate granger causes exchange rate volatility, but the exchange rate does not granger cause net exports and that net exports granger causes FDI, the FDI was found to granger net exports. The policy implication for the CBN can be seen in the fact that undermanaged capital flows and managed exchange rate regimes the bank might choose to influence growth in sectors of the economy such as the financial markets. It might not be certain that the CBN cannot thus operate an independent monetary policyasthecoreprescriptionsoftheMundell-Flemingmodelhavebeenbreached.

Keywords: Foreign direct investment; VAR; CBN; Mundell-Fleming (search for similar items in EconPapers)
JEL-codes: E58 E61 E65 E66 F62 N27 O16 O24 (search for similar items in EconPapers)
Date: 2020-09-23
New Economics Papers: this item is included in nep-his, nep-int and nep-mac
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