A small open economy model for Nigeria: a BVAR-DSGE approach
AbstractMotivated 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.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 16180.
Date of creation: 08 Jun 2009
Date of revision:
BVAR-DSGE; SOE; Nigeria;
Find related papers by JEL classification:
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-07-17 (All new papers)
- NEP-DGE-2009-07-17 (Dynamic General Equilibrium)
- NEP-MAC-2009-07-17 (Macroeconomics)
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