Impact of Central Bank Communications on Exchange Rate Dynamics in Nigeria (2007-2011).
ABSTRACT
Central Bank Communication has come to play an increasingly important role as a policy tool for monetary authorities over the past decade. This is in recognition of the powerful influence the central bank communication has on economic agents’ expectations, hence their economic decision-making.
This thesis analyzes the impact of central bank communication signals on daily (five days in a week) changes in the Naira per US dollar exchange rate for the period 2007-2011.
Theoretically, participants (especially speculators) in the foreign exchange market actively look up to the Central Bank for information to help them form expectations on the future directions of the exchange rate changes.
Communications from the Central Bank therefore convey signals that may raise daily demand/supply of foreign exchange, hence affect the daily exchange rate. To empirically determine whether communication signals affect exchange rate, an EGARCH model was estimated using daily data from 2007 to 2011.
The empirical results indicate that communication (oral interventions) has exhibited a significant and contemporaneous effect on daily exchange rates in Nigeria. Moreover, communication is found to reduce exchange rate volatility and uncertainty whereas actual interventions which are costly tend to raise volatility.
TABLE OF CONTENT
TITLE PAGE – – – – – – – – – –
DECLARATION – – – – – – – – – – ii
CERTIFICATION – – – – – – – – – iii
DEDICATION – – – – – – – – – – iv
ACKNOWLEDGEMENT – – – – – – – – v
ABSTRACT – – – – – – – – – – vii
TABLE OF CONTENTS – – – – – – – – viii
LIST OF TABLES, FIGURES AND APPENDIX – – – – xii
CHAPTER ONE
1.0 INTRODUCTION – – – – – – – – 1
1.1 BACKGROUND OF THE STUDY – – – – – – 1
1.2 PROBLEM STATEMENT – – – – – – – 5
1.3 OBJECTIVES OF THE STUDY – – – – – – – 6
1.4 HYPOTHESIS – – – – – – – – – 7
1.5 JUSTIFICATION FOR THE STUDY – – – – – – 7
1.6 SCOPE AND LIMITATION OF THE STUDY – – – – 8
CHAPTER TWO
2.0 LITERATURE REVIEW – – – – – – – 9
2.1 CONCEPTUAL LITERATURE – – – – – – 9
2.1.1 TYPES AND CONTENT OF CBN COMMUNICATION – – – 11
2.2 THEORETICAL LITERATURE – – – – – – 12
2.2.1 MONETARY POLICY, CENTRAL BANK COMMUNICATION AND THE EXCHANGE RATE – – – – – – 15
2.2.2 THEORETICAL FRAMEWORK – – – – – – 17
2.2.3 ROLE OF CENTRAL BANK COMMUNICATION ON EXCHANGE RATE DETERMINATION – – – – – – – – 19
2.3 EMPIRICAL LITERATURE – – – – – – – 24
2.4 MONETARY POLICY COMMITTEE (MPC) – – – – – 31
2.5 MONETARY POLICY IN NIGERIA – – – – – 33
2.6 MONETARY POLICY COMMITTEE (MPC) IN NIGERIA – – 34
2.7 THE FOREIGN EXCHANGE MARKET IN NIGERIA – – – – 34
2.7.1 FOREIGN EXCHANGE MARKET EVOLUTION – – – – 34
CHAPTER THREE
3.0 RESEARCH METHODOLOGY – – – – – – 39
3.1 INTRODUCTION – – – – – – – – 39
3.2 SOURCES OF DATA – – – – – – – – 39
3.3 ANALYTICAL TECHNIQUE – – – – – – 40
3.4 MODEL SPECIFICATION – – – – – – – 40
CHAPTER FOUR
4.0 PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS – – – – – – – – – 44
4.1 INTRODUCTION – – – – – – – – 44
4.2 TREND ANALYSIS OF EXCHANGE RATE – – – – 44
4.3 TEST FOR NORMALITY AND UNIT ROOT – – – – 46
4.3.1 UNIT ROOT TEST – – – – – – – 47
4.4 EXPONENTIAL GENERALIZED AUTOREGRESSIVE CONDITIONAL HETEROSCHEDASTICITY (EGARCH (2 2)) RESULTS – – 50
4.5 TEST FOR EFFECTIVENESS AND CREDIBILITY – – – – 54
CHAPTER FIVE
5.0 SUMMARY, CONCLUSION AND RECOMMENDATION – – – 55
5.1 SUMMARY OF MAJOR FINDINGS – – – – – 55
5.2 CONCLUSIONS – – – – – – – – – 56
5.3 RECOMMENDATION – – – – – – – – 57
REFERENCES – – – – – – – – 58
APPENDIX – – – – – – – – – 62
INTRODUCTION
Prior to 1990s targets for the overnight rate were rarely disclosed, but now most central banks announce target for the overnight rate typically right after policy decisions have been made. This development came as a result of the revolutionary thinking in the aspect of communication as an effective monetary policy tool.
It is argued that communications helps eliminate speculation on the part of market participants about whether a policy change has actually occurred.
Policy decisions are explained in press conferences and speeches, and recently in minutes, and communiqués, of the meetings of the Monetary Policy Committee (MPC), and reports published by central banks on their websites and more generally, the views of the central banks are elaborated upon in monthly or quarterly periodicals (Amato et al., 2003).
The Central Bank of Nigeria (CBN) has adopted various monetary policy regimes since its inception in 1959. The different monetary policy regimes that were adopted include: the Exchange rate targeting regime; (1959-1973), Monetary Targeting Regime 1974 to present;
Direct Monetary Control 1974-1992 and Indirect Monetary Control 1993 to present. Prior to 2001 these policy regimes had a monetary policy framework with short term perspective usually one year (annual).
REFERENCES
Amato, Jeffry D, Stephen Morris, and Hyun Song Shin (2002). “Communication and Monetary Policy.”Oxford Review of Economic Policy, 18 (4) 495-503.
ADB and ADF, (2009). Impact of the Global Financial and Economic Crisis on Africa.Report from the office of Chief Economist.
Blinder, A.S. (1998). Central Banking in Theory and Practice. Cambridge MA: MIT Press.
Bernanke, S. Ben (2010). “Central Bank Independence, Transparency, and Accountability” At the Institution of Monetary and Economic Studies International Conference, Bank of Japan, Tokyo, Japan.
Born, B. Ehrmann, M. and Fratzscher, M. (2011). Central Bank Communication on Financial Stability.ECB Working Paper Series No. 1332, 2011.
Blinder, A. and Morgan, J. (2005). Are Two Heads Better Than One? Monetary Policy by Committee, Journal of Money, Credit and Banking, 37(5), 798-811.
StudentsandScholarship Team.
Be the first to comment