Exchange market pressure in Nigeria and the reaction of the monetary authority: an empirical investigation

Abstract

,The paper used monetary model approach to exchange market pressure developed by Girton and Roper (1977) to construct Exchange Market Pressure (EMP) index for Nigeria and the reaction of the monetary authority in dampening the pressure during managed floating regime spanning 1999 Q I through 20 12Q4. Empirical findings from the Vector Autoregressive (VAR) method suggested that interest rate differential and external reserves were important variables in managing EMP, while domestic credit related inversely with EMP. The policy implication of this is that foreign reserves remained the most important determinant of EMP in Nigeria. Essentially, contractionary monetary policy, through increase in short -term interest rate, can be used to ease exchange market pressure.