MONETARY POLICY REACTION FUNCTION OF THE CENTRAL BANK OF NIGERIA: A NONLINEAR APPROACH

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dc.contributor.authorMUDI, Salisu
dc.date.accessioned2019-04-08T14:24:06Z
dc.date.available2019-04-08T14:24:06Z
dc.date.issued2018-04
dc.descriptionA THESIS SUBMITTED TO THE SCHOOL OF POSTGRADUATE STUDIES, AHMADU BELLO UNIVERSITY, ZARIA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF MASTER OF SCIENCE DEGREE IN ECONOMICS, DEPARTMENT OF ECONOMICSen_US
dc.description.abstractEmpirical evidence shows a divergence between the way the Central Bank of Nigeria changes its policy rate in reaction to the variations in macroeconomic variables and the models used to estimate such reaction. This study empirically examined the linearity assumptions, and hence, re-estimates a nonlinear Monetary Policy Reaction Function (MPRF) for the Central Bank of Nigeria (CBN), which was hitherto, variously, estimated using linear method. The study employed quarterly data from 2007Q1 to 2016Q2 to estimate an Exponential Smooth Transition Regression (ESTR) model. Results show that the trend (time horizon) is the transition variable. For comparative purposes, a simple quadratic nonlinear model was estimated, in which the central bank’s reaction to changes in exchange rate is assumed to be nonlinear relation. The quadratic model was estimated using the Nonlinear Two Stage Least Square (N2SLS), which appears to strengthen the findings from the ESTR. The results of the ESTR revealed that the MPRF of CBN is empirically nonlinear and that changes in the monetary policy rates do not appear to follow the Taylor’s Principle. It was also found that the CBN, as expected, reacts to inflation and exchange rates volatilities quite significantly. The reaction is, however, aggressive when inflation exceeds the threshold value of 10 percent. In addition, it was found that only the current and none of the leads, of inflation was significant. This is interpreted as reflecting the inability of the CBN to correctly forecast inflation beyond the current quarter. Hence, the study recommends that the CBN should focus on developing greater capacity for inflation forecast, which is a critical requirement for a smooth transition to the inflation targeting frameworken_US
dc.identifier.urihttp://hdl.handle.net/123456789/11476
dc.language.isoenen_US
dc.subjectMONETARY POLICY REACTION FUNCTION,en_US
dc.subjectCENTRAL BANK OF NIGERIA,en_US
dc.subjectNONLINEAR APPROACHen_US
dc.titleMONETARY POLICY REACTION FUNCTION OF THE CENTRAL BANK OF NIGERIA: A NONLINEAR APPROACHen_US
dc.typeThesisen_US
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