Determination of the Dynamic Interaction between of Macro-Prudential and Monetary Policy Mix in Nigeria: A Structural Analysis

This study develops and estimates a structural open economy model using Bayesian technique to examine the outcomes of monetary policy, financial policy and the interaction between financial and monetary policy instruments on key macroeconomic variable in Nigeria. The study utilizes quarterly data covering the period of 2007Q1 - 2015Q4. The results indicate that shocks to oil price, cash reserve ratio, macro-prudential index (capital adequacy ratio, liquidity ratio and loan-to-deposit ratio), monetary policy rate and fiscal deficit impacted on output growth, inflation, external reserves, exchange rate and credit conditions in Nigeria. It therefore implies that a positive shock to the policy rate and cash reserves ratio in Nigerian will cause a temporary appreciation in the exchange rate, increase external reserves and inflation, while output growth and credit would decline in the short run. Our findings reveal that oil price shocks tend to heighten economic agents' sensitivity to exchange rate and drive the motivation for excessive fiscal spending. Similarly, external reserves and output growth tend to worsen as a result of downward oil price shocks. A structural open economy model using Bayesian technique. The result indicates that shocks to monetary policy rate, exchange rate, macro prudential index, oil price and fiscal deficit impacted on output growth, exchange rate and credit conditions in Nigeria. It therefore implies that a positive shock to policy rate and cash reserves ratio in Nigerian economy will cause temporary appreciation of exchange rate, increase in external reserve and inflation, while output growth and credits decline in the short run. Our findings also reveal that oil price shocks tend to heighten economic agents’ sensitivity to exchange rate and drive the motivation for excessive fiscal spending. Similarly, external reserve and output growth tend to worsen as a result of oil price shock. The study recommends economic diversification from oil, enforcement of monetary and prudential policy instrument appears to check instability in macroeconomic variables.