IDEAS home Printed from https://ideas.repec.org/a/bcp/journl/v10y2026i15p71-92.html

External Reserves and the Policy Trilemma in Nigeria: Reassessing Monetary Policy Independence under Exchange Rate and Capital Flow Constraints

Author

Listed:
  • Itoro M. Ikoh

    (Department of Banking and Finance, Faculty of Management Sciences, University of Uyo, Uyo, Akwa Ibom State)

  • Sylvanus Udoh

    (Department of Banking and Finance, Faculty of Management Sciences, University of Uyo, Uyo, Akwa Ibom State)

  • Ikechukwu A. Acha

    (Department of Banking and Finance, Faculty of Management Sciences, University of Uyo, Uyo, Akwa Ibom State)

Abstract

This study reassesses the role of external reserves in shaping Nigeria’s monetary policy independence within the framework of the policy trilemma, which highlights the inherent trade-offs among exchange rate stability, capital flow openness, and monetary autonomy. Using annual data from 1981 to 2023 and employing an Autoregressive Distributed Lag (ARDL) approach, the study explores how external reserves interact with exchange rate policies and capital mobility to influence Nigeria’s monetary autonomy. The study incorporates interaction effects to capture the conditional relationships between reserves and the other two legs of the trilemma. The model also incorporates key macroeconomic variables, including oil prices, inflation, financial development, and economic growth, to control for broader structural dynamics. Findings from the long-run analysis reveal that while external reserves are theoretically expected to enhance monetary policy independence, their effect is statistically insignificant, suggesting ineffective utilization. Exchange rate stability and capital mobility also show no significant long-run impact, indicating policy inconsistency and the limited effectiveness of Nigeria’s managed float regime and partial capital controls. Notably, oil price volatility emerges as the most significant determinant, with rising prices reducing the degree of monetary policy autonomy. Short-run dynamics reveal that reserves initially constrain policy independence but show a positive effect with lags, underscoring delayed policy transmission. Interaction terms between reserves and the trilemma components are also insignificant, suggesting that reserves have not functioned as a buffer against external constraints. Error correction estimates confirm that deviations from equilibrium are corrected rapidly, yet short-run dynamics reveal delayed and asymmetric policy effects. The findings underscore the need for a more coherent macroeconomic framework, improved reserve management, reduced oil dependency, and strengthened financial markets to enhance monetary policy independence in Nigeria.

Suggested Citation

  • Itoro M. Ikoh & Sylvanus Udoh & Ikechukwu A. Acha, 2026. "External Reserves and the Policy Trilemma in Nigeria: Reassessing Monetary Policy Independence under Exchange Rate and Capital Flow Constraints," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 10(15), pages 71-92, January.
    • Handle: RePEc:bcp:journl:v:10:y:2026:i:15:p:71-92
    as

    Download full text from publisher

    File URL: https://rsisinternational.org/journals/ijriss/uploads/vol10-iss15-pg71-92-202601_pdf.pdf
    Download Restriction: no
    File URL: https://rsisinternational.org/journals/ijriss/view/external-reserves-and-the-policy-trilemma-in-nigeria-reassessing-monetary-policy-independence-under-exchange-rate-and-capital-flow-constraints/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Aizenman, Joshua & Marion, Nancy, 2003. "The high demand for international reserves in the Far East: What is going on?," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 370-400, September.
    2. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, vol. 18(2), pages 191-214, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Po-Chin Wu & Chung-Chih Lee, 2018. "The non-linear impact of monetary policy on international reserves: macroeconomic variables nexus," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 45(1), pages 165-185, February.
    2. Naveen Srinivasan & Vidya Mahambare & M. Ramachandran, 2015. "Capital Controls, Exchange Market Intervention and International Reserve Accumulation in India," Working Papers 2015-103, Madras School of Economics,Chennai,India.
    3. Chandan Sharma, 2009. "Does Full Sterilization Feasible in Era of Excess Volatility: Evidence from India," Economics Bulletin, AccessEcon, vol. 29(4), pages 2944-2950.
    4. Joshua Aizenman, 2008. "International Reserve Management and the Current Account," Central Banking, Analysis, and Economic Policies Book Series, in: Kevin Cowan & Sebastián Edwards & Rodrigo O. Valdés & Norman Loayza (Series Editor) & Klaus Schmidt- (ed.),Current Account and External Financing, edition 1, volume 12, chapter 11, pages 435-474, Central Bank of Chile.
    5. Idil Uz Akdogan, 2020. "Understanding the dynamics of foreign reserve management: The central bank intervention policy and the exchange rate fundamentals," International Economics, CEPII research center, issue 161, pages 41-55.
    6. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.
    7. Ljungwall, Christer & Xiong, Yi & Zou, Yutong, 2009. "Central Bank Financial Strength And The Cost Of Sterilization In China," Working Paper Series 2009-8, Stockholm School of Economics, China Economic Research Center.
    8. Alexander Mihailov & Harun Nasir, 2022. "Sudden Stops, Productivity and the Optimal Level of International Reserves for Small Open Economies," Open Economies Review, Springer, vol. 33(5), pages 825-851, November.
    9. Joshua Aizenman & Brian Pinto, 2013. "Managing Financial Integration and Capital Mobility—Policy Lessons from the Past Two Decades," Review of International Economics, Wiley Blackwell, vol. 21(4), pages 636-653, September.
    10. Joseph Joyce & Raul Razo-Garcia, 2011. "Reserves, quotas and the demand for international liquidity," The Review of International Organizations, Springer, vol. 6(3), pages 393-413, September.
    11. Olivier Jeanne & Romain Rancière, 2011. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," Economic Journal, Royal Economic Society, vol. 121(555), pages 905-930, September.
    12. Menzie D. Chinn, 2012. "Imbalances, Overheating and the Prospects for Global Recovery," Chapters, in: Maurice Obstfeld & Dongchul Cho & Andrew Mason (ed.), Global Economic Crisis, chapter 6, Edward Elgar Publishing.
    13. Mr. Romain Ranciere & Mr. Olivier D Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications," IMF Working Papers 2006/229, International Monetary Fund.
    14. Shijaku, Gerti, 2012. "Optimal level of reserve holding: an empirical investigation in the case of Albania," MPRA Paper 79091, University Library of Munich, Germany.
    15. Daniela Magalhães Prates & André Moreira Cunha & Marcos T. C. Lélis, 2008. "A gestão do regime de câmbio flutuante no Brasil," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807211144430, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    16. Andrew J. Filardo & Pierre L. Siklos, 2016. "Prolonged Reserves Accumulation, Credit Booms, Asset Prices and Monetary Policy in Asia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(2), pages 364-381, February.
    17. Marc-André Gosselin & Nicolas Parent, 2005. "An Empirical Analysis of Foreign Exchange Reserves in Emerging Asia," Staff Working Papers 05-38, Bank of Canada.
    18. Chandan Sharma & Sunny K Singh, 2014. "Determinants of International Reserves: Empirical Evidence from Emerging Asia," Economics Bulletin, AccessEcon, vol. 34(3), pages 1696-1703.
    19. Olivier Jeanne, 2007. "International Reserves in Emerging Market Countries: Too Much of a Good Thing?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 1-80.
    20. Prakash Kumar Shrestha, Ph.D., 2016. "Macroeconomic Impact of International Reserves: Empirical Evidence from South Asia," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 28(1), pages 1-26, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bcp:journl:v:10:y:2026:i:15:p:71-92. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dr. Pawan Verma (email available below). General contact details of provider: https://rsisinternational.org/journals/ijriss/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.