Research
Research
2020: Central bank communication during economic recessions: Evidence from Nigeria (PDF)
Abstract: This paper analyses the communication strategy of the Central Bank of Nigeria (CBN) during the 2016 economic recession. Applying text mining techniques, useful insights are derived regarding the linguistic intensity, readability, tone, and topics of published monetary policy communiques. Our results provide evidence of increased central bank communication during the recession. However, the ease of reading the published policy communiques declined, especially at the outset of the recession. In terms of tone, we find that negative policy sentiments were expressed during the 2015-2017 period; reflecting the economic uncertainties that trailed the oil price slump of 2014 and its implications for the domestic economy. The negativity of the policy sentiment score reached its trough in July 2016 and recorded an inflexion; signalling the economy’s turning point towards recovery. Based on the results of the estimated topic model, issues relating to “oil price shocks”, “external reserves”, and “inflation” were of concern to the Monetary Policy Committee (MPC) a few quarters preceding the recession while the topics relating to “exchange rate management” as well as “output growth and market stability” were dominant during the recession. Expectedly, the topic proportion for “prices and macroeconomic policies” remain relatively sizeable across the sample period, reflecting the MPC’s commitment to the CBN’s primary mandate of maintaining price stability.2020: Central bank communication in Ghana: Insights from a text mining analysis (PDF)
Abstract: Effective central bank communication is useful for anchoring market expectations and enhancing macroeconomic stability. In this paper, the communication strategy of the Bank of Ghana (BOG) is analysed using BOG’s monetary policy committee press releases for the period 2018-2019. Specifically, we apply text mining techniques to investigate the readability, sentiments and hidden topics of the policy documents. Our results provide evidence of increased central bank communication during the sample period, implying improved monetary policy transparency. Also, the computed Coleman and Liau (1975) readability index shows that the word and sentence structures of the press releases have become less complex, indicating increased readability. Furthermore, we find an average monetary policy net sentiment score of 3.9 per cent. This means that the monetary policy committee expressed positive sentiments regarding policy and macroeconomic outlooks during the period. Finally, the estimated topic model reveals that the topic proportion for “monetary policy and inflation” was prominent in the year 2018 while concerns regarding exchange rate were strong in 2019. The paper recommends that in order to enhance monetary policy communication, the Bank of Ghana should continue to improve on the readability of the monetary policy press releases.2020: Oil price shocks, fuel subsidies and macroeconomic (in)stability in Nigeria (PDF)
Abstract: This paper studies the macroeconomic implications of oil price shocks and the extant fuel subsidy regime for Nigeria. To do this, we develop and estimate a New-Keynesian DSGE model that accounts for pass-through effect of international oil price into the retail price of fuel. Our results show that oil price shocks generate significant and persistent impacts on output, accounting for about 22 percent of its variations up to the fourth year. Under our benchmark model (i.e. with fuel subsidies), we show that a negative oil price shock contracts aggregate GDP, boosts non-oil GDP, increases headline inflation, and depreciates the exchange rate. However, results generated under the model without fuel subsidies indicate that the contractionary effect of a negative oil price shock on aggregate GDP is moderated, headline inflation decreases, while the exchange rate depreciates more in the short-run. Counterfactual simulations also reveal that fuel subsidy removal leads to higher macroeconomic instabilities and generates non-trivial implications for the response of monetary policy to an oil price shock. Thus, this study cautions that a successful fuel subsidy reform must necessarily encompass the deployment of well-targeted safety nets as well as the evolution of sustainable adjustment mechanisms.2019: A text mining analysis of central bank monetary policy communication in Nigeria (PDF)
with Mohammed M Tumala Abstract: This paper employs text-mining techniques to analyse the communication strategy of the Central Bank of Nigeria (CBN) during the period 2004-2019. Since the policy communique released after each meeting of the CBN’s monetary policy committee (MPC) represents an important tool of central bank communication, we construct a corpus based on 87 policy communiques with a total of 123, 353 words. Having processed the textual data into a form suitable for analysis, we examined the readability, sentiments, and topics of the policy documents. While the CBN’s communication has increased substantially over the years, implying increased monetary policy transparency; the computed Coleman and Liau readability index shows that the word and sentence structures of the policy communiques have become more complex, thus reducing its readability. In terms of monetary policy sentiments, we find an average net score of -10.5 per cent, reflecting the level of policy uncertainties faced by the MPC over the sample period. In addition, our results indicate that the topics driving the linguistic contents of the communiques were influenced by the Bank’s policy objectives as well as the nature of shocks hitting the economy per period.2019: Business cycle fluctuations in Nigeria: Some insights from an estimated DSGE model (PDF)
Abstract: This paper develops a two-agent New Keynesian model, which is suitable for identifying the drivers of business cycle fluctuations in small open, resource-rich, resource-dependent emerging economies. We confront the model with Nigerian data on eleven macro-economic variables using the Bayesian likelihood approach and show that output fluctuations are driven mainly by oil and monetary policy shocks in the short run and domestic supply shocks in the medium term. On the other hand, monetary and domestic supply shocks jointly account for around 70 per cent of short run variations in headline and core measures of inflation while oil shocks play a less prominent role owing partly to the low pass-through effect arising from the extant fuel subsidy regime in the country. Interrogating these findings further, we find that negative oil price shocks generate a persistent negative impact on output and a short-lived positive effect on headline inflation. In terms of policy responses, the estimated Taylor rule indicates a hawkish monetary policy stance over the sample period while the estimated fiscal rule provides evidence for a pro-cyclical and rather muted fiscal policy. Since domestic supply and oil-related shocks are key sources of macroeconomic fluctuations, the study calls for a more creative use of the country’s stabilisation funds as well as strategic fiscal interventions aimed at addressing the issues of domestic supply constraints and promoting private sector investments.2019: Modelling interest rates pass-through in Nigeria: An error correction approach with asymmetric adjustments and structural breaks (PDF)
with Charles N. O. Mordi and Michael A. Adebiyi Abstract: This paper investigates the size and adjustment pattern of the interest rate pass-through (IRPT) between the policy-controlled interest rate (MPR) and seven (7) retail interest rates (lending and deposit rates) in Nigeria. This study departs from previous studies on Nigeria in the sense that it takes account of the effects of structural breaks in our modelling approach. First, we confirm the existence of long-run relationships between MPR and two retail rates (prime lending rate and savings deposit rate), albeit with significant structural breaks occurring in their cointegrating vectors at different periods. Second, we find evidence of incomplete pass-through in the response of the retail rates to MPR shocks. Third, most of the retail interest rates adjust symmetrically to changes in the policy rate, with the exception of the savings rate. This implies that the response of savings rate varies depending on whether the innovation in the MPR is positive or negative. Fourth, positive innovations in the MPR are fully reflected in the savings rate within 2 months as against 8 months for negative MPR shocks. Fifth, innovations in the MPR are fully transmitted to the prime lending rate in about 14 months while the complete pass-through to the 6-month time deposit rate occurs in about 11 months. In view of these findings, we recommend that the monetary authority should always have an eye on the size of the pass-through as well as the heterogeneities found in the adjustment process of the retail rates while taking decisions on its policy rate. Also, the low IRPT obtained suggests a stronger monetary policy stance or other supplementary measures if the objectives of MPR changes are to be fully realized.2017: Exchange rate misalignment under different exchange rate regimes in Nigeria (PDF)
with Sunday N Essien and Stephen OU Uyaebo Abstract: This study examines the dynamics of naira real exchange rate (RER) during the period 2000Q1 - 2016Q1 as well as the extent to which it deviated from its long run equilibrium path. To achieve this, we adopt the Behavioural Equilibrium Exchange Rate (BEER) model approach and incorporate the effects of an endogenously determined breakpoint in the cointegrating vector of the RER model. We found empirical support for the existence of a long-run relationship between RER and its determinants that is subject to a structural break in 2011Q1. Also, model results showed that exchange rate policy, productivity and interest rate differentials are significant determinants of real exchange rate movements. In terms of the levels of RER misalignment under different exchange rate policies considered, model results indicated that the naira was overvalued by 1.22 per cent during IFEM regime of 2000 - 2002; overvalued by 0.35 per cent during rDAS (2002 - 2006); undervalued by 0.39 per cent during wDAS (2006 - 2013) and undervalued by 0.25 per cent in the period succeeding the wDAS till March, 2016. Overall, the naira was found to be overvalued by 0.15 per cent during the sample period, implying a subsidy of 0.15 kobo per dollar.2016: Testing the Fisher hypothesis in the presence of structural breaks and adaptive inflationary expectations (PDF)
with Stephen OU Uyaebo, Yakubu A Bello, Suleiman Karu, Satumari A Stephen, Raymond O Ogbuka, Balarabe F Usman, Oluwaseun D Mimiko Abstract: This paper tested for the validity of the Fisher hypothesis in Nigeria during the period 1970 - 2014. The Gregory and Hansen Co-integration test confirmed the existence of a long-run relationship between nominal interest rates and inflation, albeit with a structural break in October 2005. In addition, the obtained Fisher coefficient in the cointegrating relation was 0.08, implying a weak form of Fisher effect in the long-run. On the basis of these findings, we upheld a weak Fisher effect in the long-run and non-existence of Fisher effect in the short-run. This implied that short term nominal interest rate is a good characterization of monetary policy stance. Also, the obtained partial Fisher effect indicated that changes in monetary policy are capable of altering the long term real interest rate and influencing economic growth through the interest rate channel. We therefore recommend a more forward looking monetary policy as a way of anchoring inflationary expectations and ensuring low and stable prices in Nigeria.2016: Determining the optimal public debt threshold for Nigeria (PDF)
with Sani Bawa, Sani I Doguwa Abstract: This paper investigates the existence of threshold effects in the relationship between public debt and economic growth in Nigeria using quarterly data. Generally, we found empirical support for an inverted U-shape relationship between public debt types and economic growth. For total public debt as percentage of GDP, model results identified a threshold level of 73.70 per cent, while the estimated inflexion points for external and domestic debts were 49.4 and 30.9 per cent, respectively. The implication of this finding is that debt accumulation in excess of the estimated threshold levels could hurt economic growth. A retrospective examination of the country's total and external debts profile indicated that the estimated threshold levels were exceeded prior to the debt forgiveness negotiated in 2005 and largely within limits afterwards. In addition, the study found empirical support for external debt accumulation opportunities, however, we caution that such additional debt incurrence be done in a manner that is consistent with the country's growth objectives.2016: External reserves and economic growth in Nigeria: An empirical investigation (PDF)
with Lawrence O Akinboyo, Sunday Oladunni and Olamide H Owolabi Abstract: The paper examines the nexus between Nigeria’s foreign reserves and economic growth. Analysis of the data from 2000:Q1 - 2013:Q2, using the modified Wald statistic of Toda and Yamamoto (1995) confirms a unidirectional causality running from external reserves to economic growth. The Gregory and Hansen co-integration test also confirms the existence of a long run relationship between the variables, but with a structural break in 2009:Q4. The study finds that external reserves drive economic growth in Nigeria, both in the short and long term horizons. Results also show that a one per cent increase in external reserves leads to 0.15 per cent increase in economic growth. Since general macroeconomic stability has growth enhancing effects, the paper endorses the CBN routine interventions in the foreign exchange market aimed at ensuring stability of the exchange rate.2015: Is real exchange rate misalignment a leading indicator of currency crises in Nigeria? (PDF)
Abstract: This paper constructs an early warning system for currency crises in Nigeria based on selected key macroeconomic indicators. It estimates the probabilities of currency crises as a logistic function of the included variables within the framework of a logit model. Particularly, the extent to which real exchange rate misalignment (RERMIS) could be used as a leading indicator of currency crisis is investigated by including its lag in the model. Our findings show that the likelihood of currency crisis increases when the real exchange rate is misaligned; the exchange rate is volatile; oil price declines; debt/GDP ratio increases; and the current account balance to GDP ratio declines. The study confirms that RERMIS represents a useful leading indicator of currency crisis in the country. The paper therefore recommends regular assessment of the Naira exchange rate vis-à-vis its equilibrium level with a view to implementing appropriate policy responses to rein in or avoid prolonged and substantial misalignment. Since all the variables enter the equation in their one period lags, the estimated model constitutes a reliable early warning system to policy makers on the possibility of impending currency crisis in the country.2015: Nonlinear adjustments between exchange rates and external reserves in Nigeria: A threshold co-integration analysis (PDF)
with Isaiah Ajibola, Ubong Udoette, and Rabia A Muhammad Abstract: This study investigates the long run relationship between exchange rate and external reserves in Nigeria during 1990Q1 - 2012Q4. We confirm the existence of threshold co-integration between the variables in Nigeria, as against linear co-integration. Consequently, a two-regime threshold vector error correction model (TVECM) is estimated via maximum likelihood procedure. Model results indicate that co-integration between the variables occurs only when the equilibrium error exceeds an estimated threshold parameter of 0.52. Having partitioned the TVECM into two regimes based on the obtained threshold, we find that the error correction coefficients of the exchange rate in the two regimes are not significant, implying that exchange rates do not respond to equilibrium error during the estimation period. On the other hand, external reserves adjust to correct past divergence, albeit only when the equilibrium error exceeds the threshold parameter. Overall, external reserves adjust to maintain long run equilibrium while exchange rates do not, which seems to align with the monetary authority's action of deploying external reserves to maintain exchange rate stability in the country.2015: Real exchange rate misalignment and economic growth in Nigeria (PDF)
with Abdulkadir I Ali, Isaiah O Ajibola, Olutope O Adetoba, and Abiola O Adeleke Abstract: This paper investigates the impact of Naira real exchange rate misalignment on Nigeria's economic growth using quarterly data spanning the period 2000-2014. We derive estimates of Real Exchange Rate Misalignment (RERMIS) by computing deviations of the actual real exchange rate from a sustainable equilibrium path that is determined using the Behavioural Equilibrium Exchange Rate (BEER) approach of Edwards (1989). Our modelling approach accounts for the possible effects of endogeneity and structural breaks in the estimated relationships. In terms of the extent of RERMIS, results show that the naira was on the average overvalued by 0.17 per cent during the study period. The Gregory and Hansen procedure provides evidence of cointegration between output and its determinants with a structural break in 2003Q2. Furthermore, we found empirical support for a negative impact of RERMIS on economic growth. In view of these findings, the study recommends the continued use of market-based exchange rate arrangements as a way of ensuring that the naira real exchange rate follows its path of sustainable equilibrium. This would complement other government policies aimed at promoting economic growth in the country.2015: Ratchet effects in currency substitution: An application to Nigeria (PDF)
with Sani Bawa, and Sani I Doguwa Abstract: This study examines the persistence of currency substitution in Nigeria by applying the Bounds testing approach to cointegration and including a ratchet variable in the estimated Autoregressive Distributed Lag (ARDL) model. Empirical results show that factors such as exchange rate risks, expected exchange rate depreciation, exchange rate spread, inflation expectations as well as the ratchet variables are significant determinants of currency substitution in Nigeria, with the ratchet variables having overarching influence in the long run. This indicates that currency substitution is persistent in Nigeria and may portend negative implications for the stability of the money demand function as well as the effectiveness of monetary policy. Among others, the study recommends strong and sustained monetary policy intervention towards encouraging deposit holders and other economic agents to switch their currency portfolio back to Naira.2013: Financial depth, financial access and economic growth in Nigeria (PDF)
with Adeniyi O Adenuga Abstract: Financial sector development is increasingly recognised as critically important to the micro-foundations of wealth creation and economic development of nations. An increasingly relevant component in this relationship relates to the issue of financial access. This paper contributes to the growing debate on the relationship between financial development indicators and output growth by investigating the long run relationship between financial depth, financial access and economic growth in Nigeria. The research question is: how growth propelling is an inclusive financial system in Nigeria? This question is of significant policy relevance, as Nigeria recently launched a financial inclusion programme as a strategy for wealth creation and poverty alleviation for her citizens. By setting up an error correction model, this paper showed that increased financial depth (measured either as ratio of broad money supply to output or as ratio of credit to private sector to output) propelled output growth in Nigeria during 1975-2012. However, population per bank branch conferred significant negative effect on economic growth, implying that financial access matters for growth in Nigeria. Therefore, the study strongly endorses the current financial inclusion programme of the Central Bank of Nigeria as a way of promoting growth in the country. Also, the authors call for the inclusion of financial access questions in the General Household Survey (GHS) questionnaire of the National Bureau of Statistics (NBS) as a way forward. This is based on the author's belief that the first step to improving financial access is measuring it. It is hoped that this effort would trigger further analysis that will help policy makers identify the real constraints to financial access in Nigeria.2013: Modelling currency crises in Nigeria: An application of Logit model (PDF)
Abstract: Currency crises inflict significant social and economic costs on economies that have suffered its occurrence. Thus, statistical models have been developed over the years to construct reliable early warning systems as part of strategies for preventing or reducing the devastating effects of such crises. To the knowledge of this study, no recent work has been done in this regard with respect to Nigeria, especially following the 2008/09 global financial crisis. Using a logit model, this paper estimates the probabilities of currency crises in Nigeria as a logistic function of selected macroeconomic variables. Particularly, it provides answer to the question of whether real exchange rate misalignment propels currency crises. The empirical investigation used quarterly data for the period 2000: Q1 to 2012: Q4. Model results show that the likelihood of currency crisis in Nigeria increases when the real exchange rate is misaligned; the exchange rate is volatile; oil price declines; debt/GDP ratio increases; and the current account balance to GDP ratio declines. Real exchange rate misalignment has overarching influence on the tendency for currency crash during the estimation period. The paper therefore recommends regular assessments of the value of the Naira exchange rate vis-à-vis its equilibrium level with a view to implementing appropriate policy responses to arrest or avoid prolonged and substantial misalignments. Since all the variables entered the equation in their one period lag, the estimated model constitutes a reliable early warning system to policy makers on the likelihood of impending currency crisis in the country.2012: Is the Naira-US Dollar real exchange rate misaligned? (PDF)
with Murjanatu U Wambai Abstract: Policy makers are generally interested in knowing the degree of real exchange rate (RER) misalignment because of its connection to currency crises and other external sector imbalances. In Nigeria, the Naira-US Dollar RER appreciated by 81.3 per cent between 2000 and 2008 and depreciated afterwards by 10.10 per cent to close at an average of N 150.72 in 2009, due to the impacts of the global financial crisis. The main thesis of this study is: Are the movements in Naira RER during QI :2000 to 02:2011 in line with the economic fundamentals or not? Based on the theory of cointegration and error correction models as well as calibrated values of relevant explanatory variables, the study obtained estimates of sustainable Naira equilibrium RER and computed the corresponding misalignment levels in a time series perspective. It was confirmed that the RER appreciation of 2002-2008 and depreciation of 2009 were consistent with the long run equilibrium trend. It was also found that the RER oscillated quite closely around its equilibrium path during the study period as it was misaligned by 0.29 per cent. Lastly, the study found a slight RER misalignment (0.03 per cent) during the RDAS/WDAS regimes and thus recommends that the current exchange rate policy in the country be retained while ensuring that official interventions in the foreign exchange market are guided by movements in relevant macroeconomic fundamentals.2012: Endogenous structural breaks and real exchange rate determination in Nigeria since Interbank Foreign Exchange Market (IFEM) (PDF)
Abstract: Starting from Obaseki (1998), several authors have developed different models of Naira equilibrium real exchange rate in a bid to better understand its behavior, albeit without accounting for the possibility and effects of structural breaks in their models. This is counter-intuitive, especially in view of exchange rate policy changes in Nigeria over the years and the occurrence of global shocks resulting from the 2008/09 financial crisis. This paper reexamines the concept of naira real exchange rate determination in the spirit of Edwards (1989), while allowing for the effects of endogenously determined structural breaks in the cointegrating vector. The results were revealing. First, three endogenous break dates were identified over the estimation period of 2000-2011, which were 2002: Q3, 2003: Q2 and 2009: Q3. Second, we found faster speed of adjustment to long run equilibrium after accounting for the effects of the identified structural breaks. Third, the model without structural breaks underestimated the misalignment level by about 250 basis points on the average. Fourth, the nominal exchange rate (an indicator of exchange rate policy) was found to be very crucial in steering the RER towards its long run equilibrium path. Fifth, the level of naira misalignment was found to be about 0.001 per cent since the introduction of WDAS, much lower than the 0.89 and 0.21 recorded during IFEM and RDAS, respectively. The study therefore calls for the retention of the current exchange rate policy (WDAS) in the country as a way of ensuring that the Naira is kept within its path of long run equilibrium.2012: Survey of foreign assets and liabilities in Nigeria 2011 report (PDF)
with Mohammed M Tumala, Olufemi I Ajibola and Oladipupo A Baruwa Abstract: The 2011 survey of foreign assets and liabilities (SOFAL) of enterprises in Nigeria was conducted in June/July 2012 by the Statistics Department of the Central Bank of Nigeria (CBN) in conjunction with the Nigerian Export Processing Zone Authority, Nigerian Investment Promotion Commission and other collaborating agencies. The survey covered large establishments numbering 320 across the country. A total of 275 completed questionnaires were retrieved and analyzed indicating a response rate of 85.9 per cent. The survey instrument was designed to capture cross border transactions/investments of the respondents during 2010 and 2011. Available data from survey returns showed that total foreign claims on the Nigerian economy (liabilities) as at end 2011 rose to N12,729.69 billion from N11,681.32 billion recorded in 2010. A breakdown of the figures showed that 74.8 per cent came in the form of direct investment, while portfolio investment and other capital flows accounted for 10.3 and 14.9 per cent, respectively. The European Union countries accounted for 54.9 per cent of the total inflow, and are followed by other Africa countries with 15.8 per cent. A breakdown in terms of recipient sectors of inward capital flows to Nigeria revealed that the extractive industries sector ranked highest with 49.4 per cent and is followed by manufacturing, which received 29.1 per cent. Total stock of outward investment as at end 2011 was N2,377.03 billion as against N2,500.14 in 2010. In 2011, Outward direct investment dominated with 84.1 per cent of the total, while Africa countries were the preferred investment destination for Nigerian enterprises receiving 93.3 per cent of the total outflow mostly by the Nigeria's banking industry. The survey also indicated a decline in investment flow to the economic free zones around the country.2012: Understanding the dynamics of inflation volatility in Nigeria: A GARCH perspective (PDF)
with Sani I. DoguwaAbstract: The estimation of inflation volatility is important to central banks as it guides their policy initiatives for achieving and maintaining price stability. This paper employs three models from the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) family with a view to providing a parsimonious approximation to the dynamics of Nigeria's inflation volatility between 1996 and 2011. Of the competing models, the asymmetric TGARCH (1,1) provides an appropriate paradigm for explaining the dynamics of headline and core CPI volatilities in Nigeria, while the symmetric GARCH (1,1) was found to be adequate for food CPI. The results are quite revealing. Firstly, model outcomes indicate high persistence parameters for the core and food CPI, implying that the impacts of inflation shocks on their volatilities die away very slowly. However, the impact of inflation shocks on headline volatility die out rather quickly. Secondly, substantial evidence of asymmetric effect was found for both headline and core inflation types while the contrary was confirmed for food inflation. Thirdly, positive inflationary shocks yielded higher volatilities in headline and core inflation than negative innovations, implying the absence of leverage effect in them. The paper finds that periods of high inflation volatility are associated with periods of specific government policy changes, shocks to food prices and lack of coordination between monetary and fiscal policies.