The Mundell-Fleming Trilemma: Implications for the CBN and the financial markets

Okotori, Tonprebofa Waikumo and Ayunku, Peter (2020): The Mundell-Fleming Trilemma: Implications for the CBN and the financial markets.

Abstract

In this paper using monthly data for the period 1981-2018, we adopted VARmethodology to show the nexus of foreign direct investment(FDI), the exchange rate (EXR), and net exports in order to reveal the effect of one variable on the other. Granger causality test, impulse response functions as well as block wald/exogeneity were used to test the given hypothesis. The results show that FDI did not granger cause exchange rate (EXR), but exchange rate granger causes exchange rate volatility, but the exchange rate does not granger cause net exports and that net exports granger causes FDI, the FDI was found to granger net exports. The policy implication for the CBN can be seen in the fact that undermanaged capital flows and managed exchange rate regimes the bank might choose to influence growth in sectors of the economy such as the financial markets. It might not be certain that the CBN cannot thus operate an independent monetary policyasthecoreprescriptionsoftheMundell-Flemingmodelhavebeenbreached.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign direct investment, VAR, CBN, Mundell-Fleming
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E65 - Studies of Particular Policy Episodes; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E66 - General Outlook and Conditions; F - International Economics > F6 - Economic Impacts of Globalization > F62 - Macroeconomic Impacts; N - Economic History > N2 - Financial Markets and Institutions > N27 - Africa ; Oceania; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy

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