Abstract
Abstract In this paper, we examine the ability of Fisher effect to describe the subjective behaviour of monetary policy responses for nations constrained by global factors. We developed and estimated a simple DSGE model for appraising the consequence of an integrated financial market predictor on national monetary policy response in Africa’s largest economies – Nigeria and South Africa. The paper integrated the theoretical intuition of the famous Fisher effect on the New Keynesian DSGE model with global predictors to describe national monetary policy response as it influence domestic financial variables and macroeconomic fundamentals. Simulations show that the existence of global factors threatens the abilities of national monetary policy to predict financial variables and macroeconomic fundamentals in their economies.
Highlights
The study examines whether Fisher effect can describe the subjective behaviour of monetary policy in the two largest economies in Africa – Nigeria and South Africa
We investigated the vulnerability of Nigerian and South African economies to disturbances to monetary policy rules in the United States and their big trading partners
Our model predicts long-run effect of the shocks on the domestic variables. We conclude these pieces of evidence for Nigerian data, we observe that the speed of adjustment to equilibrium is much faster in Nigeria than in South Africa; see Fig. 5-6
Summary
Drawing from the work of Han (2014), the aggregate product market representing the world IS curve, which explained the gap between global output as it affects the national economies in Nigeria and south Africa is presented as: (19) Monetary Policy Interdependency in Fisher Effect: A Comparative Evidence 215 Fig. 5: Impulse Response Function: Shock to World Output (South Africa)
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