International Journal of Research and Innovation in Social Science (IJRISS) | Volume VI, Issue VII, July 2022 | ISSN 2454–6186
External Economic Shocks and Monetary Policy Tools in Nigeria
Terungwa Paul Joseph Jato, Ph.D1, Joyce Mbakosun Ayaga.2
1Department of Business Administration, Joseph Sarwuan Tarka University, Makurdi, Benue State, Nigeria.
2Department of Economics and Development Studies, Federal University of Keshere, Gombe.
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.
Keyword: External economic shocks, monetary policy tools, Bayer-Hanck co-integration,
Jel Codes: E4, E5, C01 and F3
I.INTRODUCTION
In the recent times, the global economy is increasingly becoming integrated, with rapid increase in trade and higher openness degrees. And the more integrated the world economies are getting, the more they share the good and the bad which comes unprepared (i.e., as external shocks) to an economy from another or others. These external shocks alter and determines new patterns and trends in the behaviour of economic variables in an economy. The developing economies are tend to bear the brunt of such external shocks. According Özler and Rodrik (1992) “the manner in which the political system responds to external economic shocks in developing countries is a key determinant of the private investment response.” Due to international liberalization process, the Nigerian economy is assumed to be affected by external shocks at various levels including its policies like monetary policy.