An econometric investigation of monetary policy preference function in a developing economy: The case of Nigeria, 1973-1981

Felix Orah Ndukwe, Fordham University


The Nigerian economy began the 1970's with high expectations for economic growth and development. Output was rising and inflation was, relatively speaking, quite moderate. By the end of the decade, however, the economy faced a set of seemingly intractable problems: recurring coup d'etats, erratic fluctuations in the price of oil, the country's major foreign exchange earner, sluggish economic growth, balance of payments deficits, rampant corruption, rising unemployment and spiralling inflation. In their public statements, the monetary authorities in Nigeria claimed that their policies sought to alleviate the economic problems that beset the country. This dissertation presents an econometric analysis of the objectives of Nigerian monetary policy during this time. Following a review of the historical record and previous research in this field, a macroeconomic model of the Nigerian economy is developed and employed to derive a reaction function for monetary policy. Such a model is needed to identify the cross-equation restrictions and the relative weights of the authorities preference function. The complete system is then estimated with a non-linear three-stage least squares estimation procedure. Empirical estimates of the policy weights indicate that the authorities consistently acted to curb inflation, promote economic growth and maintain stability in Nigeria's balance of trade. The results, however, show they did not pursue a consistent foreign exchange rate policy. Plots of the simulations of the model reveal structural changes in several macroeconomic variables beginning in the first quarter of 1977. Results obtained from the estimation of structural equations of the model indicate the existence of a well-behaved demand for money as well as a stable money supply function. Parameter estimates of the Phillips curve trade-off between inflation and unemployment did hold. However, the exchange rate did not systematically respond to international price differentials, as the theory of purchasing power parity suggests. The instability may be linked to the periodic exchange rate controls imposed by the Central Bank of Nigeria during the period. Various tests of the theoretical restrictions on the parameters are performed. Simulations of the model are presented. The final chapter summarizes the major findings of the study, their implications and suggests possible directions in which future studies can extend the research.

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Recommended Citation

Ndukwe, Felix Orah, "An econometric investigation of monetary policy preference function in a developing economy: The case of Nigeria, 1973-1981" (1989). ETD Collection for Fordham University. AAI8919998.