the caurse of poverty in nigeria
Applied Econometrics and International Development.
AEID.Vol. 5-2 (2005)
MONETARY POLICY AND MACROECONOMIC
INSTABILITY IN NIGERIA: A RATIONAL EXPECTATION
APPROACH
FERIDUN, Mete *
FOLAWEWO, Abiodun
OSINUBI, Tokunbo
Abstract
Generally, both fiscal and monetary policies seek at achieving relative macroeconomic stability. Based o countries’ experience on n the role of monetary policy in controlling economics instability, this study examines the efficacy of monetary policy in controlling inflation rate and exchange rate instability. The analysis performed is based on a rational expectation framework that incorporates the fiscal role of exchange rate. Using quarterly data spanning over 1980: 1 to
2000: 4, and applying time series test on the data used, the paper shows that the effort of monetary policy at influencing the finance of government fiscal deficit through the determination of the inflationtax rate affects both the rate of inflation and the real exchange rate, thereby causing volatility in their rates. The paper reveals that inflation affects volatility of its own rate as well as in the rate of real exchange. The policy import of the paper is that monetary policy should be set in such a way that the objective it is to achieve is well defined. Key words: Monetary Policy, Nigeria, exchange rate.
JEL codes: C5, E52, F33,
*
Mete Feridun Faculty of Economics and Administrative Studies. Cyprus
International University Nicosia, Cyprus. E
-mail: mete.feridun@lycos.com.
Abiodun Oluwole Folawewo Department of Economics Olabisi Onabanjo
University Ago-Iwoye, Ogun State, Nigeria. Tokunbo Simbowale Osinubi
Department of Economics Faculty of the Social Sciences University of
Lagos, Akoka, Yaba, Lagos, Nigeria E-mail: tokunbosinubi@yahoo.co.uk
69
Applied Econometrics and International Development.
AEID.Vol. 5-2 (2005)
1. Introduction
The primary goal of monetary policy is to maintain stable prices or low and stable
AEID.Vol. 5-2 (2005)
MONETARY POLICY AND MACROECONOMIC
INSTABILITY IN NIGERIA: A RATIONAL EXPECTATION
APPROACH
FERIDUN, Mete *
FOLAWEWO, Abiodun
OSINUBI, Tokunbo
Abstract
Generally, both fiscal and monetary policies seek at achieving relative macroeconomic stability. Based o countries’ experience on n the role of monetary policy in controlling economics instability, this study examines the efficacy of monetary policy in controlling inflation rate and exchange rate instability. The analysis performed is based on a rational expectation framework that incorporates the fiscal role of exchange rate. Using quarterly data spanning over 1980: 1 to
2000: 4, and applying time series test on the data used, the paper shows that the effort of monetary policy at influencing the finance of government fiscal deficit through the determination of the inflationtax rate affects both the rate of inflation and the real exchange rate, thereby causing volatility in their rates. The paper reveals that inflation affects volatility of its own rate as well as in the rate of real exchange. The policy import of the paper is that monetary policy should be set in such a way that the objective it is to achieve is well defined. Key words: Monetary Policy, Nigeria, exchange rate.
JEL codes: C5, E52, F33,
*
Mete Feridun Faculty of Economics and Administrative Studies. Cyprus
International University Nicosia, Cyprus. E
-mail: mete.feridun@lycos.com.
Abiodun Oluwole Folawewo Department of Economics Olabisi Onabanjo
University Ago-Iwoye, Ogun State, Nigeria. Tokunbo Simbowale Osinubi
Department of Economics Faculty of the Social Sciences University of
Lagos, Akoka, Yaba, Lagos, Nigeria E-mail: tokunbosinubi@yahoo.co.uk
69
Applied Econometrics and International Development.
AEID.Vol. 5-2 (2005)
1. Introduction
The primary goal of monetary policy is to maintain stable prices or low and stable