Empirical Evidence on the Relationship between Central Bank Intervention and Macroeconomic Variables in Nigeria

Abstract

There is evidence that foreign exchange interventions are significant sources of fluctuations on macroeconomic variables than the conventional monetary policy. The paper aims to establish, interactively, the relationship between interventions and macroeconomic variables in Nigeria. The paper employs the vector autoregressive approach, in which the effect of intervention and exogenous macroeconomic shocks is jointly examined, to characterize the interaction. The results identify the existence of interactions among the model’s variables. The intervention shocks have significant negative impact on the exchange rate, and the exchange rates also response to shocks from other macroeconomic policies. In addition, the reaction of intervention to the exchange rate, as leaning against the wind, is significant. The evidence further reveals that the impact of intervention shocks to exchange rate fluctuation is more than one of the conventional monetary policy shocks. Amongst others, the paper recommends the implementation of a more transparent and accountable intervention regimes as well as that embarking on reforms that encourage exports in order to earns more foreign exchange to have funds to support interventions in stabilising the exchange rates.

Keywords

• foreign exchange intervention
• exchange rate
• macroeconomic variables
• vector autoregressive