The Effectiveness of Monetary Policy Under Flexible Exchange Rate Regime Flexible Exchange Rate Regime in Nigeria.
ABSTRACT
This study investigates the effectiveness of monetary policy under flexible exchange rate regime in Nigeria using Ordinary Least Square approach. Quarterly time series data spanning 1980:1 – 2008:4 is used in this work.
The study examines stochastic characteristics of each time series by testing their stationarity using Augmented Dickey Fuller (ADF) test. This is followed by performing co integration test using Augmented Engle-Granger (AEG) technique.
The results of the cointegration test indicates that the residuals estimated from our RGDP and CPI equation are not stationary at both 5% and 1% levels of significance implying that the variables used in this regression are not cointegrated.
The absence of no co integration means that long run equilibrium relationship does not exist among the nonstationary variables.
The result suggests that government should through its monetary policy actions and operations in money market continue to influence the exchange rate direction such that it ensures the competitiveness of the domestic economy.
Thus, the study concludes that under flexible exchange rate regime monetary policy instruments impacted significantly on real output, Consumer price index and balance of payment account in Nigeria.
TABLE OF CONTENTS
Title Page ————————————————————————————– i
Certification ———————————————————————————– ii
Approval Page ——————————————————————————– iii
Dedication ————————————————————————————- iv
Acknowledge ———————————————————————————- v
Table of Contents —————————————————————————- vi
Abstract ————————————————————————————— vii
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study …………………………………………………… 1
1.2 Statement of the Problem …………………………………………………… 4
1.3 Objectives of the Study ……………………………………………………… 7
1.4 Hypothesis of the Study ……………………………………………………… 8
1.5 Policy Relevance …………………………………………………………….. 8
1.6 Scope of the Study ……………………………………………………………8
CHAPTER TWO: LITERATURE REVIEW
2.1 Theoretical Framework …………………………………………………………9
2.1.1 Theoretical Literature………… ………………………………………………. 9
2.2 Empirical Literature.. …………………………………………………………..16
2.3 Limitation of Previous Studies ………………………………………………….20
CHAPTER THREE:
3.1 Historical and Current development of monetary policy in Nigeria………….22
3.2 Exchange Rate Management in Nigeria (Pre SAP Period)……………………28
3.3 Post SAP Period…………….…………………………………………………..29
3.4 Alternative Exchange Rate Regimes in Nigeria…..….…..………….…..……..31
CHAPTER FOUR: METHODOLOGY
4.1 Methodological framework ………………………………………………… 34
4.2 The Model……………………………………………………………………34
4.3 Model Specification …………………………………………………………..35
4.4 Estimation Procedure…………………………………………………………37
4.5 Co-integration and Error Correction … ………………………………………38
4.6 Justification of the Models………………………………………………….. …38
4.7 Data Sources/ Econometric Software…………………………………………39
CHAPTER FIVE: DATA PRESENTATION, ANALYSIS AND INTEPRETATION
5.1 Test Results for Unit Root ………………………………………………….. 40
5.2 Result of Co-integration Test… ………………………………………………40
5.3 Empirical Results and Implications…….. .……………………………………41
CHAPTER SIX: SUMMARY OF FINDINGS, POLICY RECOMMENDATION
AND CONCLUSION
6.1 Summary of Findings ………………………………………………………. 45
6.2 Policy Recommendation …………………………………………………… 46
6.3 Conclusion …………………………………………………………………..47
References …………………………………………………………………………. 48
INTRODUCTION
The Bretton Woods monetary system of fixed exchange rates, which evolved immediately after the Second World War, worked fairly well for nearly thirty years until 1973 when it broke down. U.S. huge current account deficits occasioned by its involvement in the Vietnam War, posed significant challenges to the system.
Upon the demise of the Bretton Woods system, a generalized system of floating exchange rates emerged, particularly for the developed countries.
The developing countries have had varied experiences with exchange rate regimes, in choosing exchange rate regimes, developing countries need to be fully aware of the circumstances and conditions for their successful adoption.
The important factors and criteria in such choices also need to be properly understood. Various forms of exchange rate regimes are open to individual countries.
They range from clean floating or flexible exchange rate regime at one extreme to firmly fixed arrangements at the other extreme, with the remaining regimes falling in a continuum in between.
These include managed float, pegs, target zones, currency boards, monetary union and dollarization Obadan (2009). In the last few years, a number of developing economies including Nigeria have moved from fixed to flexible exchange rates.
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StudentsandScholarship Team.
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