Evaluating the Effect of Monetary Policy on Current Account in Nigeria

Despite several empirical investigations on the interaction effect between monetary policy transmissions and the current account balances of countries, evidences have been inconclusive. This study examines the monetary policy transmission effect on current account in Nigeria from 1970 to 2021. Employing the vector error correction model (VECM) procedures, the results of the stationarity test indicate that all the variables are first differenced I(1) at 5% significance level in Augmented Dicky Fuller test procedure. The cointegration test results showed that there are three cointegrating equations at 5% significance level. The long-run results showed that coefficient of interest rate (INTR) indicated a negative sign to the current account of Nigeria and it is statistically significant. The shortrun result shows that 2.2% of the disequilibrium in the effect monetary policy on current account of Nigeria is corrected annually. The impulse response function results showed that response of current account to the global monetary policy variable, (USINTR) increased immediately and continued significantly with positive sign in the long run the result showed that response to INTR and rate of exchange (EXCH) declined immediately and continued to decline along the horizon to a negative shock in both the short and long-runs. Therefore, importation of industrial materials should be encouraged to increase the country’s export volume.

JEL classification: B23, C13, E52, E63, F32, N17