Monetary policy and macroeconomic instability in Nigeria: A rational expectation approach

• Mete Feridun ^[1] ; Abiodun Oluwole Folawewo ^[3] ; Tokunbo Simbowale Osinubi ^[2]
  1. [1] Cyprus International University

     Cyprus International University

     Chipre

     
  2. [2] University of Lagos

     University of Lagos

     Nigeria

     
  3. [3] University Ago-Iwoye

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• Localización: Applied econometrics and international development, ISSN 1578-4487, Vol. 5, Nº. 2, 2005, págs. 69-90
• Idioma: inglés
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• Resumen

  • 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 inflationtax 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.