An Evaluation of Foreign Exchange Intervention and Monetary Aggregates in Nigeria (1986- 2003)
The paper investigates the impact of foreign exchange intervention in the Nigerian foreign exchange market using an Autoregressive Distributed Lag (ARDL) modeling approach. Quarterly time series data spanning 1986:1 to 2003:4 are used and a number of statistical tools are employed to verify this hypothesis. The study examines stochastic characteristics of each time series by testing their stationarity using Phillip Perron (PP) test. This is followed by performing cointegration test using Johansen technique. The existence of co-integration motivates us to estimate the error correction model for broad money, M2. The overall finding from all the techniques employed is that foreign exchange intervention in Nigeria is sterilized because the cumulative aid, which constitute part of foreign exchange inflows, and net foreign assets variables, which are proxies for intervention, are not significant. Thus, paper concludes by recommending, among others, that the use of stock of external reserves to support the exchange rate through increased funding of the foreign exchange market should be encouraged.
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- M. Hashem Pesaran & Ron P. Smith, 1998. "Structural Analysis of Cointegrating VARs," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 471-505, December.
- Simatele, Munacinga C H, 2004. "Financial sector reforms and monetary policy reforms in Zambia," MPRA Paper 21575, University Library of Munich, Germany.
- Kearney, Colm & MacDonald, Ronald, 1986. "Intervention and sterilisation under floating exchange rates: The UK 1973-1983," European Economic Review, Elsevier, vol. 30(2), pages 345-364, April.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
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