MEASURING THE EFFECTS OF MONETARY POLICY INNOVATIONS IN NIGERIA: A STRUCTURAL VECTOR AUTOREGRESSIVE (SVAR) APPROACH Chuku A. Chuku1 University of Uyo, Nigeria. email@example.com
Correctly identifying the effects of monetary policy innovations is necessary for good policy making. In this paper, we carry out a controlled experiment using a structural vector autoregression (SVAR) model to trace the effects of monetary policy shocks on output and prices in Nigeria. We make the assumption that the Central Bank cannot observe unexpected changes in output and prices within the same period. This places a recursive restriction on the disturbances of the SVAR. We conduct the experiment using three alternative policy instruments i.e. broad money (M2), Minimum Rediscount Rate (MRR) and the real effective exchange rate (REER). Overall, we find evidence that monetary policy innovations carried out on the quantity-based nominal anchor (M2) has modest effects on output and prices with a very fast speed of adjustment. While, innovations on the price-based nominal anchors (MRR and REER) have neutral and fleeting effects on output. We conclude that the manipulation of the quantity of money (M2) in the economy is the most influential instrument for monetary policy implementation. Hence, we recommend that central bankers should place more emphasis on the use of the quantity-based nominal anchor rather than the price-based nominal anchors. Keywords: Monetary innovations, structural vector autoregression, output effect, price effect. JEL: E32, E30, P24
Department of Economics, University of Uyo, P.M.B 1017, Uyo, Nigeria.
African Journal of Accounting, Economics, Finance and Banking Research Vol. 5. No. 5. 2009. Chuku A. Chuku
I. INTRODUCTION AND MOTIVATION
What are the actual effects of monetary policy shocks on output and prices? The answer to this question has exercised the minds of central bankers and academicians from the time of the Classical quantity theorists in the 20th century to the monetarists in the 1950‟s and 60‟s and until present day economists. The answers to this question has been highly idiosyncratic, depending on the structure of the economy under investigation, the approach being adopted, the choice of variables used and the identifying restrictions imposed on the models. Correctly measuring and understanding what monetary policy can do (as well as what it cannot do) is essential for good policy-making and for choosing among alternative macro-economic frameworks. The empirical literature contains a preponderance of studies both in developed and developing countries that seek to measure the effects of monetary policy innovations (unanticipated shifts) on the business cycle (see for e.g. Cushman and Zha, 1997; Christiano et al., 1999; and Bernanke and Mihov 1998; Khan et al., 2002; Berument, 2007). Although these studies return puzzling results2 from their analysis, there however seems to be a consensus about the impacts of monetary policy shocks on output and prices in developed economies as Christiano et al. (2002) discuss. Interestingly, in a developing economy like Nigeria, the potentials for using monetary policy innovations to engender real economic effects are less clear. The ambiguity may stem from the inherent imperfections in the goods, money and labour markets, and the unsticky nature of prices among others. So that, monetary policy innovations may just pass quickly through to prices and have little or no real effects. In the past, central bankers and academicians have tried to clarify the ambiguities in the effects of monetary policy innovations in Nigeria, using single-equation, simultaneousequations and (or) the narrative approach (see for e.g. Balolgun, 2007; Odusola, 2005; Uchendu, 1996; Adamgbe, 2004 and Nnanna, 2001). This paper improves on previous studies by...