Effect of Monetary Policy on Exchange Rate in Nigeria: Examining the Pre-and-Post Global Financial Crisis
Keywords:
Monetary Policy, Exchange Rate, Interest Rate, Global Finance Crisis
Abstract
The authors investigated how monetary policy has affected the exchange rate in Nigeria before and after the global financial crisis, using Autoregressive Distributed Lag (ARDL) and Granger causality test. It is evident from the empirical results that a decrease (increase) in the supplyof moneyand increase (decrease) in interest rates of Nigeria have led to the appreciation (depreciation) of the national currency before Global Financial Crisis (GFC). However, this has led to the depreciation (appreciation) of the domestic currency after GFC. In summary, the Central Bank of Nigeria had a better control on the exchange rate before the GFC. Also, the causality test revealed that Nigeria’s exchange rate drives money supply before the GFC, while money supply and interest rate drive the exchange rate after the GFC. Therefore, policies that are conducive to stabilising monetary variables are essential in attaining exchange rate stability. Besides, the government should ensure optimal control of liquidity surplus in the banking system in order to strengthen the stability of the financial sector.
References
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Akçağlayan, A. (2008). The effects of interest rate policy on exchange rates during 2001 currency crises. AbantIzzetBaysal University Journal of Social Sciences, 9 (1), 1-20. (in Turkish).
Akhter, F. and Faruqui, N. (2015).Effects of macroeconomic variables on exchange rates in Bangladesh.International Journal of Scientific & Engineering Research, 6(2), 1028-1034.
Andrieș, A. M., Ihnatov, L., Căpraru, B., and Tiwari, A. K. (2017).The relationship between exchange rates and interest rates in a small open emerging economy: The case of Romania. Economic Modelling, 6(c), 153-172
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Boughton, J. M. (2002). On origins of the Flaming-Mundell model.Policy Development and Review Department, Working Paper No. 107.
Cassel, G. (1918). The present situation of the foreign exchanges. Economic Journal, 26, 62-65.
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Chinn, Menzie D., and Meredith, Guy (2004). Monetary policy and long horizon uncovered interest parity. IMF Staff Papers. 51(3) pp. 409-430.
Chinn, Menzie D., and Meredith, Guy (2005) Testing uncovered interest parity at short and long horizons during the post-Bretton Woods era. National Bureau of Economic Research, Working Paper No. 1107.
Curkierman, A. (2013). Monetary policy and institutions before, during, and after the global financial crises.Journal of Financial Stability, 9, 373-384.
De Grauwe, P. (2000). Exchange rate in search of fundamental variable. Centre for Economic Policy Research, Discussion Paper No.1073.
Dilmaghani, A. K. and Tehranchian, A. M. (2015).The impact of monetary policies on the exchange rate: a GMM approach. Iran. Econ. Rev., 19 (2), 177-191.
Dornbusch, R. (1979). Monetary policy under exchange-rate flexibility. National Bureau of Economic Research, Working Paper No, 311. Doi:10.3386/w0311.
Fadun, S. O. (2011). Nigeria‘s new monetary policy framework in line @ http:/www.jidefadun.netfmoneyartpolicy.htm
Fleming, J.M. (1962). Domestic financial policies under fixed and floatingexchange rates. Staff papers, international monetary fund, 9, 369-379.
Frenkel, J. A., and Johnson, H. G. (1976).The monetary approach to balance of payment. Allen& Unwin, London, and University of Toronto Press, Toronto.
Granger, C.W.J. (1969).Investigating causal relations by econometric model and cross-spectral model method. Econometrica .37: 424-35.
Hoffmann, M. and MacDonald, R. (2009).Real exchange rates and real interest rate differentials: a present value interpretation. Institute for Empirical Research in Economics, Working Paper No. 404.
Iganiga, B. O. (2012). Macroeconomics: concept, theory and application. Lagos, Nigeria: Amfitop Books.
Inoue, A. and Rossi, B (2018).The effects of conventional and unconventional monetary policy onexchange rates. National Bureau of Economic ResearchWorking Paper No. 25021.
Isedu, M. (2013).Effect of monetary policy on economic performance: the case of Nigeria. Unpublished Ph.D. thesis from the department of economics, University of Greenwich, United Kindom.
Iyoha, M. A., and Ekanem, O. T. (2004).Introduction to Econometrics. Benin City: March Publishers.
Joseph, T. B. and Thaddeaus, L. D. (2013). The relationship between monetary policy (MPR) and bank rates: Evidence from regression and multivariate causality analysis. AFREVIJAH: An International Journal of Arts and Humanities, 2(1), 234-256
Kayhan, S., Bayat, T. &Uğur, A. (2013).Interest rates and exchange rate relationship in BRIC-T countries. Ege Academic Review, 13 (2), 227- 236.
Komolafe, B. (2006, December 5). CBN new monetary policy replaces MRR with MPR. Vanguard (Lagos).Retrieved from https://www.allafrica.com.
Kwakye, K. (2015). An examination of the relationship between exchange rate and key macroeconomic variables in Ghana: an autoregressive distributed lag (ARDL) approach. Unpublished Masters Dissertation from the department of Business administration, Kwame Nkrumah University, Ghana.
Levich, R. M. (1983).Empirical studies of exchange rates: Price behavior, rate determination and market efficiency. National Bureau of Economic Research Working Paper No. 1112.
Meade, J. E. (1951). The balance of payments. The Theory of International Economic Policy, 1, 1-11.
Mundell, R. (1963). Capital mobilityand stabilization policy under fixed and flexible exchange rates. Canadian Journal of economics and political science, 29, 475-485.
Mussa, M. (1976). The exchange rate, the balance of payments, and monetary and fiscal policy under a regime ofcontrolled floating. Scandinavian Journal of Economics, 78(2),229-248.
Ndubuisi, P., Uma, K. E., &Obidike, P.C.(2017). Monetary policy and exchange rate stability in Nigeria: An Empirical Investigation. International Journal of Humanities, Arts, Medicine and Sciences, 5(4), 15-26.
Njimanted, G. F. (2009). Money supply, interest rate, economic growth in Cameroon. Journal of the Cameroon Academy of Sciences, 8(2), 123-130.
Nwoba, M. O., Nwonu, C., and Agbaeze, E. (2017).Impact of fallen oil prices on the Nigerian economy. Journal of Poverty, Investment and Development 33, 2017
Officer, L. (1976).The purchasing-power-parity theory of exchange rates: a review article. International Monetary Fund, 23 (1), 1-60.
Ojo, O.M and Temitayo, A.T. (2018). An empirical determinants of the exchange rate in Nigeria. International Journal of Scientific Research and Management, 6(5), 412-423. Doi.org/10.18535/ijsrm/v6i5.em07.
Olatunji, J. and Weilang, H. (2017).The effect and policy analysis of global financial crisis on Nigeria economy. International Journal of Management Science and Business Administration, 3(4), 58- 64.Doi: 10.18775/ijmsba.1849-5664-5419.2014.34.1007.
Ozsoz, E., Akinkunmi, M., Ay, I. C., and Bamidele, A. (2017). How CBN confronted the meltdown: The global financial crisis and the central bank of Nigeria’s response. The Singapore Economic Review, 62 (1), 147–161.
Pesaran, M.H., Shin, Y., and Smith, R. J. (2001). Bound testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, pp. 289- 326.
Precious, C. and Palesa, M. (2014). Impact of monetary policy on economic growth: A Case Study of South Africa. Mediterranean Journal of Social Sciences, 5(15), 76-84.
Samour, A. and Resatoglu, N. G. (2018). Monetary policy and exchange rates pre-and post-global financial crisis: the case of Turkey. Journal of History Culture and Art Research, 7(5), 83-91. doi:http://dx.doi.org/10.7596/taksad.v7i5.1615.
Saraç, T.B., and Karagöz, K. (2015). Impact of Short-term Interest Rate on Exchange Rate: The Case of Turkey. Procedia Economics and Finance, 38, 195 – 202.
Tarı, R. &Abasız, T. (2009). Frequency domain approach and short run and long run causality test: Evidence from Turkey for interest rate and exchange rate relationship. METU Studies in Development, 36, 405-421.
Ufoeze, L.O., Okuma, N.C., Nwakoby, C., and Alajekwu, U.B. (2018).Effect of Foreign Exchange Rate Fluctuations on Nigerian Economy. Annual of SpiruHaret University, Economic Series...Doi: 10.26458/1814
Umoru, D. (2013). Monetary models and exchange rate determination: The Nigerian Evidence. International Journal of Development and Management Review, 8(1), 172-197.
West, K. D. (2004). Monetary policy and the volatility of real exchange rates in New Zealand.National Bureau of Economic Research, Working Paper no. 10280.
Whiteman, M. V. N. (1975). Global monetarism and monetary approach to the balance of payments. Brookings Papers on Economic Activity, 2, 491-536.
Zamanian, G., Pahlavanl, M., and Ranjbarouri, F. (2013).Causal relationship between money stock and exchange rate under the fixed and floating regime. International Journal of Academic Research in Progressive Education and Development, 2(1), 75- 82.
Akçağlayan, A. (2008). The effects of interest rate policy on exchange rates during 2001 currency crises. AbantIzzetBaysal University Journal of Social Sciences, 9 (1), 1-20. (in Turkish).
Akhter, F. and Faruqui, N. (2015).Effects of macroeconomic variables on exchange rates in Bangladesh.International Journal of Scientific & Engineering Research, 6(2), 1028-1034.
Andrieș, A. M., Ihnatov, L., Căpraru, B., and Tiwari, A. K. (2017).The relationship between exchange rates and interest rates in a small open emerging economy: The case of Romania. Economic Modelling, 6(c), 153-172
Baxter, M (1994). Real exchange rates and real interest rate differentials: Have we missed the business cycle relationship? Journal of Monetary Economics.(33)1 pp. 5-37
Boughton, J. M. (2002). On origins of the Flaming-Mundell model.Policy Development and Review Department, Working Paper No. 107.
Cassel, G. (1918). The present situation of the foreign exchanges. Economic Journal, 26, 62-65.
CBN (2007).The Conduct of monetary policy. Retrieved from https://www.Cbn.gov.ng/conduct/2007.asp.Accessed on 5th May 2019.
CBN (2008).The Conduct of monetary policy. Retrieved from https://www.Cbn.gov.ng/conduct/2007.asp.
Chinn, Menzie D., and Meredith, Guy (2004). Monetary policy and long horizon uncovered interest parity. IMF Staff Papers. 51(3) pp. 409-430.
Chinn, Menzie D., and Meredith, Guy (2005) Testing uncovered interest parity at short and long horizons during the post-Bretton Woods era. National Bureau of Economic Research, Working Paper No. 1107.
Curkierman, A. (2013). Monetary policy and institutions before, during, and after the global financial crises.Journal of Financial Stability, 9, 373-384.
De Grauwe, P. (2000). Exchange rate in search of fundamental variable. Centre for Economic Policy Research, Discussion Paper No.1073.
Dilmaghani, A. K. and Tehranchian, A. M. (2015).The impact of monetary policies on the exchange rate: a GMM approach. Iran. Econ. Rev., 19 (2), 177-191.
Dornbusch, R. (1979). Monetary policy under exchange-rate flexibility. National Bureau of Economic Research, Working Paper No, 311. Doi:10.3386/w0311.
Fadun, S. O. (2011). Nigeria‘s new monetary policy framework in line @ http:/www.jidefadun.netfmoneyartpolicy.htm
Fleming, J.M. (1962). Domestic financial policies under fixed and floatingexchange rates. Staff papers, international monetary fund, 9, 369-379.
Frenkel, J. A., and Johnson, H. G. (1976).The monetary approach to balance of payment. Allen& Unwin, London, and University of Toronto Press, Toronto.
Granger, C.W.J. (1969).Investigating causal relations by econometric model and cross-spectral model method. Econometrica .37: 424-35.
Hoffmann, M. and MacDonald, R. (2009).Real exchange rates and real interest rate differentials: a present value interpretation. Institute for Empirical Research in Economics, Working Paper No. 404.
Iganiga, B. O. (2012). Macroeconomics: concept, theory and application. Lagos, Nigeria: Amfitop Books.
Inoue, A. and Rossi, B (2018).The effects of conventional and unconventional monetary policy onexchange rates. National Bureau of Economic ResearchWorking Paper No. 25021.
Isedu, M. (2013).Effect of monetary policy on economic performance: the case of Nigeria. Unpublished Ph.D. thesis from the department of economics, University of Greenwich, United Kindom.
Iyoha, M. A., and Ekanem, O. T. (2004).Introduction to Econometrics. Benin City: March Publishers.
Joseph, T. B. and Thaddeaus, L. D. (2013). The relationship between monetary policy (MPR) and bank rates: Evidence from regression and multivariate causality analysis. AFREVIJAH: An International Journal of Arts and Humanities, 2(1), 234-256
Kayhan, S., Bayat, T. &Uğur, A. (2013).Interest rates and exchange rate relationship in BRIC-T countries. Ege Academic Review, 13 (2), 227- 236.
Komolafe, B. (2006, December 5). CBN new monetary policy replaces MRR with MPR. Vanguard (Lagos).Retrieved from https://www.allafrica.com.
Kwakye, K. (2015). An examination of the relationship between exchange rate and key macroeconomic variables in Ghana: an autoregressive distributed lag (ARDL) approach. Unpublished Masters Dissertation from the department of Business administration, Kwame Nkrumah University, Ghana.
Levich, R. M. (1983).Empirical studies of exchange rates: Price behavior, rate determination and market efficiency. National Bureau of Economic Research Working Paper No. 1112.
Meade, J. E. (1951). The balance of payments. The Theory of International Economic Policy, 1, 1-11.
Mundell, R. (1963). Capital mobilityand stabilization policy under fixed and flexible exchange rates. Canadian Journal of economics and political science, 29, 475-485.
Mussa, M. (1976). The exchange rate, the balance of payments, and monetary and fiscal policy under a regime ofcontrolled floating. Scandinavian Journal of Economics, 78(2),229-248.
Ndubuisi, P., Uma, K. E., &Obidike, P.C.(2017). Monetary policy and exchange rate stability in Nigeria: An Empirical Investigation. International Journal of Humanities, Arts, Medicine and Sciences, 5(4), 15-26.
Njimanted, G. F. (2009). Money supply, interest rate, economic growth in Cameroon. Journal of the Cameroon Academy of Sciences, 8(2), 123-130.
Nwoba, M. O., Nwonu, C., and Agbaeze, E. (2017).Impact of fallen oil prices on the Nigerian economy. Journal of Poverty, Investment and Development 33, 2017
Officer, L. (1976).The purchasing-power-parity theory of exchange rates: a review article. International Monetary Fund, 23 (1), 1-60.
Ojo, O.M and Temitayo, A.T. (2018). An empirical determinants of the exchange rate in Nigeria. International Journal of Scientific Research and Management, 6(5), 412-423. Doi.org/10.18535/ijsrm/v6i5.em07.
Olatunji, J. and Weilang, H. (2017).The effect and policy analysis of global financial crisis on Nigeria economy. International Journal of Management Science and Business Administration, 3(4), 58- 64.Doi: 10.18775/ijmsba.1849-5664-5419.2014.34.1007.
Ozsoz, E., Akinkunmi, M., Ay, I. C., and Bamidele, A. (2017). How CBN confronted the meltdown: The global financial crisis and the central bank of Nigeria’s response. The Singapore Economic Review, 62 (1), 147–161.
Pesaran, M.H., Shin, Y., and Smith, R. J. (2001). Bound testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, pp. 289- 326.
Precious, C. and Palesa, M. (2014). Impact of monetary policy on economic growth: A Case Study of South Africa. Mediterranean Journal of Social Sciences, 5(15), 76-84.
Samour, A. and Resatoglu, N. G. (2018). Monetary policy and exchange rates pre-and post-global financial crisis: the case of Turkey. Journal of History Culture and Art Research, 7(5), 83-91. doi:http://dx.doi.org/10.7596/taksad.v7i5.1615.
Saraç, T.B., and Karagöz, K. (2015). Impact of Short-term Interest Rate on Exchange Rate: The Case of Turkey. Procedia Economics and Finance, 38, 195 – 202.
Tarı, R. &Abasız, T. (2009). Frequency domain approach and short run and long run causality test: Evidence from Turkey for interest rate and exchange rate relationship. METU Studies in Development, 36, 405-421.
Ufoeze, L.O., Okuma, N.C., Nwakoby, C., and Alajekwu, U.B. (2018).Effect of Foreign Exchange Rate Fluctuations on Nigerian Economy. Annual of SpiruHaret University, Economic Series...Doi: 10.26458/1814
Umoru, D. (2013). Monetary models and exchange rate determination: The Nigerian Evidence. International Journal of Development and Management Review, 8(1), 172-197.
West, K. D. (2004). Monetary policy and the volatility of real exchange rates in New Zealand.National Bureau of Economic Research, Working Paper no. 10280.
Whiteman, M. V. N. (1975). Global monetarism and monetary approach to the balance of payments. Brookings Papers on Economic Activity, 2, 491-536.
Zamanian, G., Pahlavanl, M., and Ranjbarouri, F. (2013).Causal relationship between money stock and exchange rate under the fixed and floating regime. International Journal of Academic Research in Progressive Education and Development, 2(1), 75- 82.
Published
2020-03-01
Section
Articles
