Olayeni, Olaolu Richard (2009): A small open economy model for Nigeria: a BVAR-DSGE approach.
Download (760kB) | Preview
Motivated by the way a small open economy should react to business cycles, we have estimated a small open economy (SOE) model for Nigeria. This is with a view to understanding how the Nigerian economy should be managed in the face of a cycle such as the current global meltdown. Our SOE model is used to generate dummy observation priors for the VAR in line with the BVAR-DSGE technique. We consider four monetary policy rules and estimate each of the resulting models using DYNARE 4.0.2. We find that the Central Bank of Nigeria (CBN) places little weight on the exchange rate behaviour in reacting to the cycles, resulting in overshooting and persistence in the exchange rate but strongly reacts to the behaviour of inflation and, to a lesser degree, of output, output gap or its growth following the shocks.
We conclude that it will be important for the CBN to pursue a guided exchange rate policy by actively responding to the exchange rate movement to avoid overshooting and persistence, that the terms of trade must be endogenize and that there is scope for the CBN to learn from past policy outcome by building a much stronger feedback.
|Item Type:||MPRA Paper|
|Original Title:||A small open economy model for Nigeria: a BVAR-DSGE approach|
|Keywords:||BVAR-DSGE; SOE; Nigeria|
|Subjects:||D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General
C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics
|Depositing User:||Olaolu Richard Olayeni|
|Date Deposited:||12. Jul 2009 19:11|
|Last Modified:||21. May 2015 17:26|
Adjemian, S., M. Darracq. Paries and S. Moyen (2008) Towards a Monetary Policy Evaluation, European Central Bank, Working Paper Series No 942 September.
Calvo, G., (1983) Staggered Contracts in a Utility-Maximizing Framework.'' Journal of Monetary Economics} 12, 383-398.
Da Silveira., M. A. C., (2008) Using a Bayesian Approach to Estimate and Compare New Keynesian DSGE Models for the Brazilian Economy: the Role for Endogenous Persistence, RBE Rio de Janeiro v62 No1 pp 1-25 Jan-Mar.
Del Negro, M., and F. Schorfheide (2004)} Priors from General Equilibrium Models for VARs, International Economic Review, 45(2), pp 643-673.
Del Negro M., F. Schorheide, F. Smets and R. Wouters (2007)On the Fit of New Keynesian Models, Journal of Business and Economic Statistics, 25(2), pp 123-143.
Gali, J., and T. Monacelli (2005) Monetary Policy and Exchange Rate Volatility in a Small Open Economy, Review of Economic Studies, Vol. 72, pp 1165-1192.
Hamilton, J.D. (1994)} Time Series Analysis}. Princeton University Press. Princeton.
Hodge, A., T. Robinson and R. Stuart (2008) A Small BVAR-DSGE for Forecasting the Australian Economy, Reserve Bank of Australia, Research Discussion Paper 2008/04
Lees, K., T. Matheson and C. Smith (2007)}, Open Economy DSGE-VAR Forecasting and Policy Analysis: Head to Head with the RBNZ Published Forecasts, Reserve Bank of New Zealand Discussion Paper No 2007/01.
Liu, P., (2006) A Small New Keynesian Model of the New Zealand Economy, Reserve Bank of New Zealand, Discussion Paper 2006/03.
Lubik, T. A. and F. Schorfheide (2005) Do Central Banks Responds to Exchange Rate Movements? A structural investigation, Journal of Monetary Economics, November
Lucas, R., (1976), Econometric Policy Evaluation: A Critique, Carnegie-Rochester Conference Series on Public Policy, 1, pp 19-46.
Sims, C., and T. Zha (2006), Were there regime switches in US monetary policy? American Economic Review, 96(1) pp 54-81.
Smets, F., and R. Wouters (2005). Comparing Shocks and Frictions in US and Euro Area Business Cycles: a Bayesian DSGE Approach. Journal of Applied Econometrics, 20(2) pp 161-183.