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Modelling macroeconomic trilemma and central bank behaviour in Nigeria: a Markov-switching approach

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Abstract

This study investigates macroeconomic trilemma and central bank behaviour in Nigeria. The period of investigation spans the quarterly period of 1981–2017. Upon the data stability condition of Zivot-Andrew unit-root test with structural breaks, the Markov-switching dynamic regression was employed as the technique of analysis. With a validated trilemma hypothesis, the study found that the trilemma constraints hold for the Nigerian economy but at the expense of the autonomy of the monetary authority. Being the policy variable of the Central Bank of Nigeria, the exchange rate was found to follow two regimes of fixed and managed-float regimes. The results also showed that political risk was significantly sensitive to both regimes of exchange rate, while the foreign interest rate and the net export led to exchange rate appreciation under the managed-float regime but depreciation under the fixed regime. The study recommends that the foreign sector be made competitive for proper exchange rate management, while impulses from the political institutions should be put under check.

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Fig. 1

Source: Underlining data from CBN Statistical Bulletin (2018). Note: DMBs—Deposit Money Banks

Fig. 2

Source: Underlining data from Central Bank of Nigeria Annual Statistical Bulletin (2018) and WDI (2018)

Fig. 3

Source: Underlining data from Central Bank of Nigeria Statistical Bulletin (2018)

Fig. 4

Source: Underlying data from the CBN Statistical Bulletin (2018)

Fig. 5

Source: Underlining data from CBN Statistical Bulletin (2015) and ICGR (2016)

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Availability of data and material

The data for this study are available on request.

Notes

  1. See Rizavi et al. (2011); Pasricha (2010); Chinn and Ito (2008); Baele et al. (2004).

  2. See Frankel (1995); Haque and Montiel (1991); Montiel (1994).

  3. Vo (2005); Quinn, Schindler and Toyoda (2011); Yabara (2012)

  4. See Frankel, Schmukler and Serven (2004); Shambaugh (2004); Reade and Volz (2011).

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Acknowledgements

The author appreciate the research platforms and sponsorship created by the African Economic Research Consortium (AERC) to present this work at the different fora of research and intellectual capacities; especially during the Biannual Conferences held in Johannesburg, South Africa, and Arusha in Tanzania, respectively, both in June and December 2017, respectively.

Funding

There is no research fund for this study. However, the African Economic Research Consortium (AERC) is greatly appreciated for creating the research funds toward the completion of my Ph.D. programme, product of which is this research paper.

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  1. Department of Economics, Fountain University, P.M.B. 4491, Oke-Osun, Osogbo, Osun State, Nigeria

    Taofeek Olusola Ayinde

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Dr. T.O. Ayinde is the Head, Department of Economics, Fountain University, P.M.B. 4491, Oke-Osun, Osogbo, Nigeria. He is an Alumni of the African Economic Research Consortium (AERC), Nairobi, and he obtained a Collaborative Ph.D. Programme (CPP) Degree at the University of Ibadan, Nigeria.

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Correspondence to Taofeek Olusola Ayinde.

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Ayinde, T.O. Modelling macroeconomic trilemma and central bank behaviour in Nigeria: a Markov-switching approach. Econ Change Restruct 55, 1303–1325 (2022). https://doi.org/10.1007/s10644-021-09346-4

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