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Monetary Policy Instability in Nigeria: A Rational Expectation Approach

Author

Listed:
  • Onye, Kenneth U.
  • Bassey, Godwin E.
  • Daasi, Gibson L.K.

Abstract

This paper aims at evaluating the efficacy of monetary policy in controlling macroeconomic instability in Nigeria. The analysis performed is based on a rational expectation framework that incorporates the fiscal role of exchange rate. Using annual data spanning from 1980 to 2010, the study affirms that the effort of monetary policy in Nigeria aimed at influencing the finance of government fiscal deficit through the determination of the inflation-tax rate affects both the rate of inflation and the real exchange rate, thereby causing volatility in these rates. The policy import of the paper is that monetary policy should be set in such a way that the objective it seeks to achieve is well defined and articulated.

Suggested Citation

  • Onye, Kenneth U. & Bassey, Godwin E. & Daasi, Gibson L.K., 2012. "Monetary Policy Instability in Nigeria: A Rational Expectation Approach," MPRA Paper 88299, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:88299
    as

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    File URL: https://mpra.ub.uni-muenchen.de/88299/1/MPRA_paper_88299.pdf
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    References listed on IDEAS

    as
    1. Jean‐Paul Azam, 2001. "Inflation and Macroeconomic Instability in Madagascar," African Development Review, African Development Bank, vol. 13(2), pages 175-201.
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    3. Drugeon, Jean-Pierre & Wigniolle, Bertrand, 1996. "Continuous-Time Sunspot Equilibria and Dynamics in a Model of Growth," Journal of Economic Theory, Elsevier, vol. 69(1), pages 24-52, April.
    4. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
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    6. Azam, Jean-Paul, 1999. "Institutions for Macroeconomic Stability in Africa," Journal of African Economies, Centre for the Study of African Economies, vol. 8(0), pages 6-29, December.
    7. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Monetary policy; economic instability; Nigeria; rational expectation;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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