A Small Open Economy Model for Nigeria: A BVAR - DSGE Approach

24 Pages Posted: 12 Jul 2009

See all articles by Olaolu Richard Olayeni

Olaolu Richard Olayeni

Department of Economics, Obafemi Awolowo University, Ile-Ife, Nigeria

Date Written: July 8, 2009

Abstract

Motivated by the way a small open economy should react to business cycles, we have estimated a small open economy (SOE) model for Nigeria. This is with a view to understanding how the Nigerian economy should be managed in the face of a cycle such as the current global meltdown. Our SOE model is used to generate dummy observation priors for the VAR in line with the BVAR-DSGE technique. We consider four monetary policy rules and estimate each of the resulting models using DYNARE 4.0.2. We find that the Central Bank of Nigeria (CBN) places little weight on the exchange rate behaviour in reacting to the cycles, resulting in overshooting and persistence in the exchange rate but strongly reacts to the behaviour of inflation and, to a lesser degree, of output, output gap or its growth following the shocks. We conclude that it will be important for the CBN to pursue a guided exchange rate policy by actively responding to the exchange rate movement to avoid overshooting and persistence, that the terms of trade must be endogenize and that there is scope for the CBN to learn from past policy outcome by building a much stronger feedback.

Keywords: BVAR-DSGE, SOE, Nigeria

JEL Classification: C11, C13, C69

Suggested Citation

Olayeni, Olaolu Richard, A Small Open Economy Model for Nigeria: A BVAR - DSGE Approach (July 8, 2009). Available at SSRN: https://ssrn.com/abstract=1432802 or http://dx.doi.org/10.2139/ssrn.1432802

Olaolu Richard Olayeni (Contact Author)

Department of Economics, Obafemi Awolowo University, Ile-Ife, Nigeria ( email )

Ile-Ife
Nigeria
+234(0)8059856698 (Phone)

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