Remittances, financial development and the effectiveness of monetary policy transmission mechanism in Nigeria: a DSGE approach (1986–2018)

Abstract

The study examines the effect of remittance inflows on the effectiveness of monetary policy transmission channels in Nigeria using the New-Keynesian DSGE model. The study employs quarterly data spanning from 1986:1 to 2018:4. Four different channels are considered namely interest rate, exchange rate, credit and expectation channels. Results show that remittance inflows hinder the effectiveness of monetary policy channels. This implies the bulk of remittance inflows into the country do not pass through the financial system. Rather, the inflow is through the informal channels thereby making it difficult for the monetary authority to control the amount of inflow. Furthermore, given the impact of remittance on output gap, it shows that remittance has low persistence in the economy despite the inflow. This implies the bulk of remittance inflow is spent on consumption and not investment. Considering the effect of remittance inflow on inflation, the inflow is not inflationary. The study concludes that to better sterilize the effect of remittance inflow in the country, monetary policy authority should encourage the inflow through the financial system.

Effectiveness of Monetary Policy Transmission Mechanism in an Implicit Inflation Targeting Regime: The Case of Nigeria.

“…The DSGE results showed that unanticipated shock had short-run impacts on the transmission mechanism while anticipated had long-run impacts. Also, Apanisile and Osinubi (2020) examined the effectiveness of the monetary transmission mechanisms in the face of financial sector development in Nigeria between 2004:1 and 2016:4; by estimating the sticky-price DSGE model using a Bayesian approach. The results showed that the credit channel was the most active in stimulating output, while expectation channel was the most active channel in stabilising prices.…”

“…Estimating the DSGE model could be a herculean task if the appropriate technique is not used. Several authors (Ajemian, 2013;Akinlo and Apanisile, 2019;Apanisile and Osinubi, 2020) have favoured Bayesian estimation techniques over all other available techniques. The preference for Bayesian approach arises because of the identification problem and lack of precision that may be encountered when other techniques are used.…”

“…To estimate the parameters of the model, our study employed quarterly data spanning from 2000:1 to 2019:4, on seven macroeconomic indicators, namely output gap, nominal interest rate, domestic inflation rate, nominal exchange rate, nominal money balance, domestic credit to the private sector, and terms of trade. The output gap variable was computed by taking the natural log of the ratio of trend output to real output (Ajilore and Ikhide, 2013;Apanisile and Ajilore, 2013;Akinlo and Apanisile, 2019;Apanisile and Osinubi, 2020). The trend real output was estimated using a Hodrick-Prescott filter on the output data.…”

“…The priors for the Phillips curve and the IS curve estimates were obtained from the work of Adebiyi and Mordi (2011), Mordi et. al ( 2013), Akinlo and Apanisile (2019), and Apanisile and Osinubi (2020). Priors of the estimated parameters and that of the standard errors of shocks are presented in tables 1and 2.…”

“…Therefore, the purpose of this study is to investigate the effectiveness of monetary policy transmission channels in Nigeria under implicit inflation targeting regime using Dynamic Stochastic General Equilibrium (DSGE). The choice of DSGE is informed by its numerous advantages in policy analysis over other techniques (Peiris and Saxegaard, 2007;Akinlo and Apanisile, 2018;Apanisile and Osinubi, 2020).…”