MONETARY POLICY DYNAMICS IN NIGERIA: EMPIRICAL EVIDENCES FROM BAYESIAN VECTOR AUTOREGRESSION WITH STOCHASTIC VOLATILITY

Recent events have highlighted the potential importance of nonlinear efiects of flscal variables (notably debt and deflcits) on interest rates: While in times when government solvency is not a concern the standard crowding-out efiects are of moderate magnitude, in times when default risk becomes an issue the interest rate efiects can become very large. This paper provides new evidence on the magnitude of these efiects. For the case when default risk is not a concern, it uses an arbitrage-free term structure model to estimate the dynamic efiects of flscal policy shocks on interest rates along the entire maturity spectrum. For the case when default risk becomes a concern (thereby violating a central assumption of the term structure model), I present evidence based on EMU government bond spread regressions on time-varying efiects of national flscal policies on spreads as well as the time-varying sensitivity of yield spreads to international risk aversion as a function of the state of flscal policy. JEL classiflcation: E6, H6.

Many scholars have examined the importance of the money supply to the macroeconomics in developed countries. However, few studies have explored this proposition in developing countries. So, in this paper, annual series data from 2000 to 2016 is applied to analyze the relationship between the money supply (M2) and the macroeconomic variables (the real GDP, the inflation rate & the interest rate) under the vector auto regression (VAR) model in China. The purpose of this paper is to verify the impact of these variables on the money supply in China. After performing an empirical analysis, conclusions can be obtained that an increase in the real GDP can result in an increase in the money supply; Also, an increase in the inflation rate can lead to an increase in the money supply; Conversely, an increase in the interest rate can cause a decrease in the money supply. Therefore, via adjusting the change of real GDP, inflation rate and interest rate, a better control of the money supply can be performed for the policy-makers in China.

INTERRELATIONSHIP OF INFLATION, EXCHANGE RATE AND INTEREST RATES IN THE CONTEXT OF HUNGARY'S STRATEGIC POLICY

In Nigeria, monetary targeting has been a major strategy of the Central Bank of Nigeria (CBN) to control inflation. This strategy involved adjusting the various monetary tools to reign in the growth of the money supply and subdue inflationary pressure. This paper examined exchange rate dynamics and inflation targeting monetary policy in Nigeria from 1986 to 2023 under the Mundel-Fleming and inflation targeting frameworks. The variables used in this paper are inflation rate, exchange rate premium, nominal interest rate, oil price, government debt and broad money supply, food price. From the results, exchange rate premium had a positive but insignificant relationship with inflation targeting policy, nominal interest rate is negatively related to inflation rate. Oil price and inflation targeting are negatively related, while, the relationship between food prices and inflation targeting was negative and insignificant and the relationship between food prices and inflation targeting was negative and insignificant. It can be concluded that inflation targeting of the Central Bank of Nigeria has not contributed to exchange rate stability in Nigeria in the contemporaneous period, as a result, the volatility of the exchange soars with much depreciation of the domestic currency. Hence, the implication is that exchange rate stability and inflation targeting are both monetary policy strategies that can be used to manage an economy's price stability. Therefore, the combination of inflation targeting and exchange rate targeting, with a priority on the exchange rate, can be an optimal monetary strategy for the Nigerian economy.

Economic theory suggests that monetary policy can be used to stabilize an economy. However, the ability of monetary policy targets—interest rates and money supply—to stabilize an economy depends on their ability to achieve price stability. Using data from 1981 to 2018 and applying the vector error correction model, this paper seeks to determine how the changes in the inflation rate affect the ability of monetary policy tools to stabilize the Nigerian economy and stimulate investment. Empirical results suggest that the impact of the interest rates on investment depends on the level of the inflation rate. The size of the effect of interest rates on investment gets weaker as the inflation rate increases suggesting that monetary policy tools, such as the monetary policy rate (MPR), that directly change the interest rates are robust stabilization tools during periods of declining inflation rates but not relevant during periods of rising inflation rates. This is attributable to low bank lending rates. Additionally, the impact of the money supply target on investment does not depend on the level of the inflation rate. This suggests that monetary policy tools, such as open market operations, that directly change the money supply can be relevant stabilization tools during economic booms and recessions. As a result, the Central Bank of Nigeria should work to deepen the scale, capacity, and efficiency of its open market operations by ensuring that most of the people can participate with minimal transaction cost and by making different financial instruments available.

Monetary policy can be so dicey or delicate that it requires great tact from the monetary authority. Contractionary monetary policy, when pushed too far, drags the economy to recession while` extreme expansionary monetary policy sinks the economy to liquidity trap. Central banks are in charge and are expected to favorably run the monetary policy by adjusting interest rates, influencing local lending rates, buying foreign currency, printing money, and use of other tools to modulate currency exchange rates, manage inflation, etcetera, with a sole target of creating a healthy economy. This study looks into the effect of money supply rate, exchange rate and interest rate on inflation rate in Nigerian economy between 1991 and 2021. With secondary data, the variables are found to be of mixed order of integration and, therefore, the ARDL model is our parameter estimator. Our model is found to be stable and our empirical investigation reveals that both money supply rate and interest rate in Nigeria have no significant effect on Nigeria’s inflation rate while exchange `rate has a significant inverse effect on Nigeria’s inflation rate – the less favorable the exchange rate, the more biting the inflation. The study is wrapped up `with a recommendation that Nigerian government/authorities should rise up to occasion of fixing the insecurity challenges of the nation so as to create safe environment that can attract local investments as well as foreign direct investments which, among other benefits, will be favorable to Nigeria in exchange rate.

The study investigated the impact of macroeconomic variables on private investment in Nigeria for the period 1990 to 2016. To achieve these objectives, the study tests for the study modeled private equity and private real investment as the function exchange rate, financial sector development, and interest rate, openness of the economy, real gross domestic product, inflation rate and broad money supply. Ordinary least square method of data analysis was used.
 From model one, the study found that real gross domestic product have positive but insignificant effect, openness of the economy have positive and insignificant effect, interest rate have positive and significant effect, financial deepening have positive and insignificant effect while interest rate, inflation rate and exchange rate have negative effect on private real investment. The coefficient of determination (R2) proved that the independent variables can explain 62 percent variation on private real investment; the f- statistics found that the model is significant while the Durbin Watson statistics proved the presence of serial autocorrelation. The effect of macroeconomic variables on private equity investment was presented in model two. The study found that openness of the economy; real gross domestic products, broad money supply, and interest rate have negative and insignificant effect on private equity investment except openness of the economy with significant effect. Inflation rate, financial sector deepening and exchange rate have positive and insignificant effect on private equity investment except financial deepening with significant effect. The R2 proved that the independent variables can predict 66.9 percent variation on private equity investment. The f- statistics found that the model is significant while the Durbin Watson statistics proved the presence of serial autocorrelation. We conclude that macroeconomic variable have significant effect on private investment in Nigeria. We recommend that interest rate must be able to encourage higher private investment by increasing the real interstate on private savings or household savings so that larger amount of income would be saved to accumulate more capital and hence private investment. Policies should be formulated by investors and government to discourage factors that affect negatively private investment.

This study appraised monetary policy development in Nigeria and also examined the effect of monetary policy on macroeconomic variables in Nigeria for the period 1986 to 2009. The study adopted a simplified Ordinary Least Squared technique and also conducted the unit root and co-integration tests. The findings of the study showed that monetary policy have witnessed the implementation of various policy initiatives and has therefore experienced sustained improvement over the years. The result also shows that monetary policy had a significant effect on exchange rate and money supply while monetary policy was observed to have an insignificant influence on price instability. The implication of this finding is that monetary policy has had a significant influence in maintaining price stability within the Nigeria economy. The study concluded that for monetary policy to achieve its other macroeconomic objective such as economy growth; there is the need to reduce the excessive expenditure of the government and align fiscal policy along with monetary policy measure.

This study examines FDI in Nigeria and macroeconomic issues. This study expands on previous research by using short- and long-term analytical methods to show how macroeconomic factors impact FDI in Nigeria. This study used macroeconomic data to examine Nigerian FDI inflows and outflows from 1986 to 2023. The ordinary least squares (OLS) model estimated that GDP, exchange rate, and interest rate influenced gross fixed capital creation in the short term, but inflation and money supply did not influenced gross fixed capital creation in the short term. In the short run, inflation, GDP, and exchange rates correlated positively with gross fixed capital creation, whereas money supply and interest rates correlated negatively. Short run macroeconomic variables impact FDI in Nigeria either negligibly or significantly. Foreign direct investment are essential to macroeconomic growth, hence the government should maintain price stability and a stable macroeconomic climate. Nigeria needs a strong currency policy to attract FDI by keeping exchange rates stable, and monetary policy should decrease interest rate fluctuations.

Interest in modeling the relationship between the macroeconomy and the agricultural economy has risen steadily since Schuh's 1974 article which illustrated the potential effects of macroeconomic policy shocks on the agricultural sector. A variety of authors has examined the effects of exchange rates, interest rate, money supply and general price level shocks on agricultural variables (prices, exports, etc.). A variety of techniques has also been used to examine these relationships. Both structural econometric models and time series approaches have been employed. In this study a new economietric technique, Vector Autoregressive (VAR) modeling, is used to investigate the impact of macroeconomic factors on the Canadian agricultural sector. Vector Autoregressive models (VARs) are dynamic simultaneous equation models. VAR models allow the data to provide a representation of the changes in the system without the restrictions on coefficients that are usually used in the estimation of simultaneous equation econometric models. VAR models focus on the dynamic paths of the variables in the system. They provide a concise summary of the dynamic interrelationships in an economic system. In this study, several forms of VAR models are used to examine the dynamic interaction of agricultural prices, exports and macroeconomic variables. There are a number of significant conclusions from the empirical analysis performed in this study. First, there appear to be significant macroeconomic impacts on the Canadian agricultural sector. Other studies of macroeconomic-sectoral linkages have found limited impact of macroeconomic factors. This study, however, using a relatively new methodology, has discovered a stronger integration. The strongest linkage appears to be between interest and exchange rates and agricultural output prices. There is little direct impact from domestic inflation. Such a result is not surprising given the international nature of Canadian agriculture. Input prices do not appear to be as significantly affected by macroeconomic shocks as are output prices. Such a result may be interpreted as providing support to the hypothesis that input and output prices in agriculture exhibit the fixed-price flex-price phenomenon. The methods used in this study are relatively new and they provide a flexible approach to modeling economic time series. It is apparent that the conditions assumed by the researcher significantly affect the empirical results. In this study we have modified existing techniques to provide more plausible identification restrictions on the model. The results indicate that the agricultural sector, in particular through agricultural output prices, is sensitive to exchange rate and interest rate variation. The techniques used here may be applied in future research to investigate the impact of macroeconomic variables on specific commodities and on regions of the country.

This research work investigated the impact of monetary policy on foreign trade in Nigeria during the period 1981 to 2017. The research made use of secondary data which are collected from the Central Bank of Nigeria, Statistical Bulletin (2017). The model obtained from the result represents a Error Correction Model (ECM) which relates the dependent variable (Net Import) to several predictor variables Money Supply, Interest Rate, Exchange Rate, Foreign Direct Investment and Trade Openness. From the findings of the study, the error correction term (speed of adjustment towards equilibrium) value of -0.53581 is significant at 5% and implies that there is a long run causality running from monetary policy activities measures of foreign trade. However, only all the variable was used in the study was significant at 5% level of significance. This implies that monetary policy in Nigeria has a positive influence on foreign trade within the period, except for interest rate that has a negative coefficient and not significant. In conclusion, these intermediate variables of monetary, the exchange rate arguably have a huge impact on the economy because of its effect on the value of local currency, domestic inflation, macroeconomic credibility, capital flows and financial stability. Increased exchange rate directly affects the prices of imported commodities and an increase in the price of imported goods and services contributes directly to increase in inflation. Based on the analysis, the study concluded that there is significance relationship between money supply and net import in Nigeria and also that there is relationship between foreign direct investment and net import in Nigeria. The study also shows that there is relationship between trade openness and net import in Nigeria.

The aim of the study is to examine the impact of macroeconomic variables on stock market performance in Sri Lanka. This study uses yearly data collected from the annual report of the Central Bank of Sri Lanka for the period from 1990 to 2019. Macroeconomic variables used in this study are interest rate, inflation rate, real exchange rate, and money supply while All Share Price Index (ASPI) is used to measure the stock market performance. Inflation rate and interest rate are found stationary at zero levels while exchange rate, money supply and stock market performance are found stationary at levels one in the Augmented Dickey-Fuller (ADF) test. No serial correlation is found among variables by employing Breusch-Godfrey LM Test. The Auto-Regressive Distributed Lag (ARDL) bounds test is used to test the long-run and short-run relationships between variables. The empirical result reveals that there is a negative and significant impact of interest rate and inflation rate on stock market performance while exchange rate and money supply do not hold any significant impact on stock market performance in the long-run. Further, it is found that there is a negative and significant impact of interest rate on stock market performance in the short run.

Stock prices are usually analysed and explained in terms of underlying financial indicators, such as earnings per share or dividend payout ratios. Nevertheless, fluctuations in the conditions of the economy can result in changes in demand, which can impact on profits and dividends. Since macroeconomic variables affect financial indicators it follows that macroeconomic variables affect stock prices. If markets are rational and efficient, then stock prices will reflect all known information regarding macroeconomic factors that are perceived to affect stock prices. It follows that stock prices should not change significantly unless there is a surprise or news about the state of the economy (as reflected in unexpected changes in macroeconomic variables). Intuitively, this implies that models of stock price determination based on news ought to be superior to conventional models that use the levels or changes in variables. The utilisation of news in research on stock prices is very limited. Two approaches have been traditionally used to represent the news in the absence of surveys of expectations: either by assuming announcements are news such as those in event studies or by using an econometric time series approach to extract the news components from total changes in the variables, as is the case with the news model. The majority of studies involving news models have been in the foreign exchange market using news estimated econometrically—very little has been done in estimating and testing a macro news model of stock prices and certainly nothing has been done on stock prices in developed economies such as Australia. Thus this research is motivated by the significant gaps in the literature with respect to the development, estimation and testing of a news model of stock prices. Most of the studies that investigate the relations between macro variables and stock prices have been carried out using conventional approaches by estimating models that use the variables in their levels. Some of the multivariable models of stock prices arise as a result of anomalies found in implementing the capital asset pricing model. Other multivariable approaches such as the arbitrage pricing theory (APT), due to Ross (1976), suggest that macro variables are useful, but APT is silent on the appropriate macroeconomic explanatory variables. Furthermore, there have been limited attempts to examine macroeconomic variables collectively, but not with the aim of developing a macro model of stock prices. This thesis presents the results of research that uses comprehensive econometric procedures to investigate which macroeconomic variables have significant effects on Australian stock prices and whether news about such variables can enhance the performance of conventional stock price determination models. Seven macroeconomic variables are examined: interest rates, inflation, the money supply, economic activity, commodity prices, exchange rates and a foreign stock market index to account for spill-over effects. This provides a valuable contribution to the understanding of the individual effects of macroeconomic variables on stock prices and adds to the limited literature regarding the usefulness of news in models of stock price determination. The results from this research demonstrate that although news is a theoretically sound and intuitively plausible basis for improving macro models of stock prices, in practice there is no ex-ante exploitation possible by estimating news utilising econometric methods. Simply put, news cannot be predicted—this is established by using three comprehensive methods of estimating news, which is the residual of a model fitted to the time series data of a particular variable.

This study aims to examine the relationship between macroeconomic variables, namely inflation, rupiah exchange rate, gross domestic product, money supply, and interest rates on the Net Asset Value (NAV) of Islamic Mutual Funds. The sampling method used purposive sampling with 9 mutual fund companies from 2013 to 2020. This study used a panel data regression method with a random effect model. The results showed that inflation and interest rates did not show any effect on the NAV of Islamic Mutual Funds. There is no effect on inflation because the inflation rate in Indonesia is still at a low level. The interest rate has no effect because the character of mutual funds is a long-term investment instrument. The money supply and the exchange rate have a significant positive effect on the NAV of Sharia Mutual Funds. This is due to the increase in the money supply and the rupiah exchange rate from year to year. Meanwhile, gross domestic product has a significant negative effect on the NAV of Sharia Mutual Funds. This is because the NAV of mutual fund companies from year to year depreciates, while gross domestic product from year to year appreciates.

This study examines the effect of monetary policy on economic growth of West African Monetary Zone (WAMZ) countries from 2002 - 2022. In the model, money supply (M2), interest rate (INTR), and inflation rate (INFR) are considered the independent variable while real gross domestic product (RGDP) is given as the dependent variable. This study used Ordinary Least Square (OLS) and Panel regression analysis, and finding indicate that money supply and interest rate have positive and statistically significant impact on economic growth among WAMZ member countries. The inflation rate has negative and significant impact on GDP. The random effect model on the other hand reveals that money supply is positive and statistically significant on GDP. Similarly, the effect of interest rate is positive but statistically insignificant on economic growth. However, the impact of inflation rate is negative but statistically significant on economic growth of the WAMZ member countries. Therefore, the study recommends the implementation of sound monetary policies such as expansionary Open Market Operation (to increase money supply as increase in money supply increases economic growth), adjust the contractionary discount rate (by reducing the rate of interest rate in order to expand liquidity and investment). The study also recommended that WAMZ country’s banks should be committed to the mission of price stability, as well as improving the regulatory and supervisory framework to secure a strong financial sector for efficient intermediation, economic growth and development.