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Monetary Policy-Making in Nigeria: Does evidence support augmented Taylor Rule?

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  • Onanuga, Abayomi
  • Oshinloye, Michael
  • Onanuga, Olaronke

Abstract

This paper relies on the augmented Taylor rule to evaluate the reaction function of the historical path of nominal monetary policy rate in Nigeria in the period 1996:Q1-2014:Q4. The main technique of analysis is the GMM econometric approach and the reaction function is augmented with the real exchange rate. Evidence from the study suggests that the real output and exchange rate are both significant in explaining the path of monetary policy rate while the inflation variable was not statistically significant. Monetary policy reacts negatively to lagged real exchange rate and current real exchange rate but positively to lagged real output gap. We conclude that lag of real exchange rate has a greater effect on the policy rate consequently inflation targeting is not a primary objective of the CBN. Based on economic theory, the study recommends the adoption of Taylor rule because findings from such rule based approach can be used to stabilize output and inflation in Nigeria.

Suggested Citation

  • Onanuga, Abayomi & Oshinloye, Michael & Onanuga, Olaronke, 2015. "Monetary Policy-Making in Nigeria: Does evidence support augmented Taylor Rule?," MPRA Paper 83329, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:83329
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    References listed on IDEAS

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    1. George A. Kahn, 2012. "The Taylor Rule and the Practice of Central Banking," Book Chapters, in: Evan F. Koenig & Robert Leeson & George A. Kahn (ed.), The Taylor Rule and the Transformation of Monetary Policy, chapter 3, Hoover Institution, Stanford University.
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    Cited by:

    1. Patricks Ogiji & Tersoo Shimonkabir Shitile & Nuruddeen Usman, 2022. "Estimating asymmetries in monetary policy reaction function: an oil price augmented Taylor type rule for Nigeria under unconventional regime," Economic Change and Restructuring, Springer, vol. 55(3), pages 1655-1672, August.

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    More about this item

    Keywords

    Monetary Policy; Real Output; Inflation rate; Exchange Rate; GMM;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • P44 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - National Income, Product, and Expenditure; Money; Inflation

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