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Monetary Policy and Macroeconomic Instability in Nigeria: A Rational Expectation Approach

22 Pages Posted: 21 Aug 2008  

X X

Abiodun O. Folawewo

affiliation not provided to SSRN

Tokunbo Simbowale Osinubi

affiliation not provided to SSRN

Date Written: 2005

Abstract

Generally, both fiscal and monetary policies seek at achieving relative macroeconomic stability. Based on countries' experience on 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 inflation-tax 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.

Keywords: Monetary policy, Nigeria, Exchange rate

JEL Classification: C5, E52, F33

Suggested Citation

X, X and Folawewo, Abiodun O. and Osinubi, Tokunbo Simbowale, Monetary Policy and Macroeconomic Instability in Nigeria: A Rational Expectation Approach (2005). Applied Econometrics and International Development, Vol. 5, No. 2, 2005. Available at SSRN: https://ssrn.com/abstract=1237522

Abiodun O. Folawewo

affiliation not provided to SSRN ( email )

No Address Available

Tokunbo Simbowale Osinubi

affiliation not provided to SSRN ( email )

No contact information is available for X X

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