Business Cycle Fluctuations in Nigeria: Some Insights from an Estimated DSGE Model

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

Modelling Currency Crises in Nigeria: An Application of Logit Model

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. Keywords: Currency crises, exchange rate misalignment, exchange market pressure, logit mode

Central Bank Communication during Economic Recessions: Evidence from Nigeria

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

BENZENE ORAL BIOAVAILABILITY ASSESSMENT USING IN VITRO DIGESTION MODEL IN COMBINATION WITH CELL CULTURE METHODOLOGY

The bioavailability of volatile organic compounds (VOCs) in a given situation often remains challenging to assess, and the lack of standard methods for introducing VOCs into in vitro bioassays can lead to poorly defined bioavailable concentrations. As a result, in vitro assays normally conducted in wells of cell culture plates for risk assessment of volatile and hydrophobic organic chemicals (VHOCs) have always faced significant experimental difficulties due to high volatility and high hydrophobicity. This compromises the true exposure concentration by: (i) causing the amount of test substances in the test medium to decline, (ii) limits the quality of toxicological responses and their extrapolation, and thus, can lead to interpretational errors. In the research herein, a dosing method was developed to assess the bioavailability of benzene (that served as a model for VHOCs) in aqueous tests and to better characterize exposure estimates for an improved risk assessment during in vitro biotests. This study hypothesizes that (1) benzene bioavailability to intestinal porcine enterocyte cell line (IPEC-1 cells) can be partially explained by phase partitioning, as measured by freely dissolved concentration that drives the diffusive uptake into the cell membranes, (2) benzene equilibrium partitioning between the donor and the cell membranes is dependent upon energetic state of the chemical concentration in the partitioning donor, which describes its chemical activity. Silicone polydimethylsiloxane (PDMS) was used as the partitioning donor for passive dosing in transwell plates. The buffering capacity of the donor compensates for routine loss against depletion processes during the toxicity tests, resulting in stable exposure concentrations of benzene freely available to cells at relatively constant chemical activity. For IPEC-1 cells in the passive dosing tests, the median effective concentration (EC50) was 4.82 mg/L. The obtained median effective activity (Ea50) value is within the chemical activity range (0.01– 0.1) for baseline toxicity of several hydrophobic chemicals reported in the literature. Cell inhibition ranged from 9.6 ± 2% to 97.7 ± 0.8% for freely dissolved concentrations of benzene, which ranged from 0.6 to 5.4 mg/L after 24 h exposure. The spiking tests result in an ECSpike-50 projected to be greater than 5.4 mg/L, (highest spiked concentration) and reduced test sensitivity of benzene to IPEC-1 cells. This study introduces a new effective approach to passive dosing and demonstrates the utility of passive dosing over solvent spiking for in vitro toxicity testing of hydrophobic chemical (log Kow ˂ 4.6) with high volatility. This has fundamental implications for a better understanding of the interactions between VHOCs exposure to humans and the toxic effects on the human intestine to help set remediation objectives and further the improve future risk assessment and standard setting for VHOCs

Business Cycle Fluctuations in Nigeria: Some Insights from an Estimated DSGE Model

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

Endogenous Structural Breaks and Real Exchange Rate Determination in Nigeria since Interbank Foreign Exchange Market (IFEM)

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 counterintuitive, 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

Endogenous Structural Breaks and Real Exchange Rate Determination in Nigeria since Interbank Foreign Exchange Market (IFEM)

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 counterintuitive, 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

Is Real Exchange Rate Misalignment a Leading Indicator of Currency Crises in Nigeria?

This paper constructs an early warning system (EWS) 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. Based on the size, sign and statistical significance of its coefficient in the currency crisis model, the study confirms that RERMIS represents a useful leading indicator of currency crisis in the country. Besides, its inclusion improves overall model performance substantially. 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 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

Central Bank Communication in Ghana: Insights from a Text Mining Analysis

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

Central Bank Communication in Ghana: Insights from a Text Mining Analysis

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