IMPACT OF CENTRAL BANK COMMUNICATIONS ON EXCHANGE RATE DYNAMICS IN NIGERIA (2007-2011)

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IMPACT OF CENTRAL BANK COMMUNICATIONS ON EXCHANGE RATE DYNAMICS IN NIGERIA (2007-2011)

Abstract:

Central Bank Communication has come to play an increasingly important role as a policy tool for monetary authorities over the past decade. This is in recognition of the powerful influence the central bank communication has on economic agents’ expectations, hence their economic decision-making. This thesis analyzes the impact of central bank communication signals on daily (five days in a week) changes in the Naira per US dollar exchange rate for the period 2007-2011. Theoretically, participants (especially speculators) in the foreign exchange market actively look up to the Central Bank for information to help them form expectations on the future directions of the exchange rate changes. Communications from the Central Bank therefore convey signals that may raise daily demand/supply of foreign exchange, hence affect the daily exchange rate. To empirically determine whether communication signals affect exchange rate, an EGARCH model was estimated using daily data from 2007 to 2011.The empirical results indicate that communication (oral interventions) has exhibited a significant and contemporaneous effect on daily exchange rates in Nigeria. Moreover, communication is found to reduce exchange rate volatility and uncertainty whereas actual interventions which are costly tend to raise volatility. We can recommend this by suggesting that communication (oral intervention) potentially constitute an effective and largely autonomous policy tool for Nigeria policy makers.

IMPACT OF CENTRAL BANK COMMUNICATIONS ON EXCHANGE RATE DYNAMICS IN NIGERIA (2007-2011)

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