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Modelling macroeconomic trilemma and central bank behaviour in Nigeria: a Markov-switching approach

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  • Taofeek Olusola Ayinde

    (Fountain University)

Abstract

This study investigates macroeconomic trilemma and central bank behaviour in Nigeria. The period of investigation spans the quarterly period of 1981–2017. Upon the data stability condition of Zivot-Andrew unit-root test with structural breaks, the Markov-switching dynamic regression was employed as the technique of analysis. With a validated trilemma hypothesis, the study found that the trilemma constraints hold for the Nigerian economy but at the expense of the autonomy of the monetary authority. Being the policy variable of the Central Bank of Nigeria, the exchange rate was found to follow two regimes of fixed and managed-float regimes. The results also showed that political risk was significantly sensitive to both regimes of exchange rate, while the foreign interest rate and the net export led to exchange rate appreciation under the managed-float regime but depreciation under the fixed regime. The study recommends that the foreign sector be made competitive for proper exchange rate management, while impulses from the political institutions should be put under check.

Suggested Citation

  • Taofeek Olusola Ayinde, 2022. "Modelling macroeconomic trilemma and central bank behaviour in Nigeria: a Markov-switching approach," Economic Change and Restructuring, Springer, vol. 55(3), pages 1303-1325, August.
    • Handle: RePEc:kap:ecopln:v:55:y:2022:i:3:d:10.1007_s10644-021-09346-4
    DOI: 10.1007/s10644-021-09346-4
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    More about this item

    Keywords

    Financial openness; Business fluctuations; Monetary independence; Markov-switching regression; Central bank behaviour;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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