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Exchange Rate Volatility and Monetary Policy Shocks

In: Macroeconomic Analysis for Economic Growth

Author

Listed:
  • Gbalam Peter Eze
  • Tonprebofa Waikumo Waikumo Okotori

Abstract

The study investigated the influence of innovations in monetary policy on the rate of exchange volatility in Nigeria. The research adopted vector error correction model as well as impulse response function and forecast error variance decomposition function in the estimation using two models derived in the study. Monthly data between the periods 2009 and 2019 were adopted for the research. Our findings show that in the long run; all the monetary policy variables have a significant long run correlation with volatility in the exchange rate; but that money supply and the rate of exchange seem to have significant short run impact on volatility in the exchange rate, the other variables such as liquidity ratio or monetary policy rate did not show a significant short run relationship with the volatility in the exchange rate. Further findings on the volatility impulse response and the forecast error variance decomposition suggest a significant link between volatility in the exchange rate and money supply though the link was much more pronounced. The use of monthly data shows that the managed exchange rate regime by the CBN seems to have the desired effect in exchange rate volatility and thus having a critical impact on inflationary spikes.

Suggested Citation

  • Gbalam Peter Eze & Tonprebofa Waikumo Waikumo Okotori, 2022. "Exchange Rate Volatility and Monetary Policy Shocks," Chapters, in: Musa Jega Ibrahim (ed.), Macroeconomic Analysis for Economic Growth, IntechOpen.
    • Handle: RePEc:ito:pchaps:243212
    DOI: 10.5772/intechopen.99606
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    Keywords

    exchange rate volatility; monetary policy; central Bank of Nigeria; exchange rate regime; vector error correction model; impulse response function; forecast error variance decomposition;
    All these keywords.

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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