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) –

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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.

Introduction

Prior to 1990s targets for the overnight rate were rarely disclosed, but now most central banks announce target for the overnight rate typically right after policy decisions have been made. This development came as a result of the revolutionary thinking in the aspect of communication as an effective monetary policy tool.

It is argued that communications helps eliminate speculation on the part of market participants about whether a policy change has actually occurred.

Policy decisions are explained in press conferences and speeches, and recently in minutes, and communiqués, of the meetings of the Monetary Policy Committee (MPC), and reports published by central banks on their websites and more generally, the views of the central banks are elaborated upon in monthly or quarterly periodicals (Amato et al., 2003).

The Central Bank of Nigeria (CBN) has adopted various monetary policy regimes since its inception in 1959. The different monetary policy regimes that were adopted include: the Exchange rate targeting regime; (1959-1973), Monetary Targeting Regime 1974 to present;

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