Policy Reversals and Economic Development: A View from the Financial Sector
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Developing countries have a variety of market
instruments that monetary authorities target to influence
the direction of growth of the economy. This paper studies
the reversals and manipulations of the market variables of
interest rate and exchange rate in the desired direction in
which the country should advance. The study employs
Granger VAR to estimate the data sourced from WDI and
Central Bank of Nigeria. The endpoints targets of Credit
to the Private Sector (CPS), Capital Formation and Gross
Domestic Product were adopted for the study. The results
show that interest rate is more significant in both
differenced and non-differenced results. The impact of
exchange rate is more evident in capital formation than in
the others. Though all the endpoints show a high-level of
significance at the overall level, interest rate is more highly
significant than exchange rate, and RGDP is the most
important for the entire variables as an endpoint. The
paper recommends the active management of interest rate
first to encourage investment rather than the current
practice and for a reduction in the rate. Since the current
management of the exchange rate is not sustainable,
literature supports the management of the variables within
control of the monetary authority while the external
variable should be less actively managed.
Keywords
HG Finance