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Determining the optimal monetary policy instrument for Nigeria

By Solomon I. Udom and Baba N. Yaaba


It is considered inapt for central banks to adjust reserve money (quantity of money) and interest rate (price of money) at the same time. Thus, necessitates the need for a choice instrument. Enough evidence abounds in microeconomic theory on the undesirability of manipulating both price and quantity simultaneously in a free market structure. The market, in line with the consensus among economists, either controls the price and allows quantity to be determined by market forces, or influence quantity, leaving prices in the hands of the forces of demand and supply. This paper is, therefore, an attempt to examine the optimal monetary policy instrument for Nigeria between 1981Q1 to 2013Q2 using a bounds testing approach to cointegration. The result indicates the superiority of monetary instrument, followed by combined instrument and then interest rate instrument. The study therefore suggests that the CBN should lay more emphasis on monetary instrument particularly if output growth or stability is the primary goal of monetary policy

Topics: C53, E43, E47, E52, ddc:330, Optimal monetary policy, ARDL, interest rate, monetary aggregate, cointegration
Publisher: Abuja: The Central Bank of Nigeria
Year: 2015
OAI identifier: oai:econstor.eu:10419/142089
Provided by: EconStor

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