Modelling central bank behaviour in Nigeria:A Markov-switching approach

Özet

The study models the behaviour of the Central Bank of Nigeria. An extended Taylor’s framework thataccounted for exchange rate dynamics and political risk factors was adopted. In order to capture both exante and ex-post behaviours of the monetary authority in the country, Markov-Switching DynamicRegression (MSDR) approach was employed. The period of investigation spanned 1981q1 e 2017q4. Thestudy found that money supply in Nigeria was endogenous and showed, consequently, that the CentralBank of Nigeria (CBN) acted discretionally rather than stick to some monetary policy rules for the periodunder investigation. The results also suggested that political risk factors significantly moderated thebehaviour of the CBN; especially during period of high interest rate regime. With or without the effects ofpolitical risks being accounted for, low interest rate regime was found to be more persistent than highinterest rate regime. With a relatively high persistence of low interest rate, the study found evidence forthe popular Fisher’s effect and, then, suggested that inflation targeting should be one of the policystrategies of the monetary authority in Nigeria.