External Economic Shocks and Monetary Policy Tools in Nigeria

Abstract

The study investigated the effect of external economic shocks on monetary policy tools in Nigeria for a period of 1990 to 2020. External economic shocks were measured though their passthrough variables of exchange rate (EXR), foreign direct investment (FDI), external debt (ED), and trade openness (TO); while monetary policy tools were considered in terms of broad money supply (M2), monetary policy rate (MPR) and cash reserve ratio (CRR). The Zivot and Andrews test and the Bayer and Hanck combined cointegration tests were employed to to check for stationarity (with structural breaks) and cointegration among the variables. We then applied the autoregressive distributed lag (ARDL) test to determine the effect of the relationship between the independent variables and the dependent variable. The results of the structural indicated that there are structural breaks accounting for the existence of shocks, while the cointegration test showed that the variables are cointegrated. The ARDL test disclosed that external economic shocks (through EXR, FDI, ED, and TO) have significant effect on monetary policy variables. This study therefore recommends that the monetary authorities should safeguard the monetary operations in Nigeria from external economic mishaps that have spillover to the country by making allowance for the external economic shocks in setting these tools and putting in place mechanisms that can make these tools resilient and resistant to the shocks