What is it about?
Countries whose currency values are affected by demand and supply forces, but whose currency values are not determined entirely by the forces of demand and supply operate what are referred to as hybrid exchange rate regimes. Such countries include Nigeria, Euro Zone countries, or the CFA countries of West Africa. In these kinds of countries, it is important that Central Banks adopt credible means for maintaining the stability of currency values. In this study, I develop and implement an empirical approach for the evaluation of Central Banks' strategies for maintaining currency valuations. Using data from Nigeria that spans the period, 2003 through 2012, I find the Central Bank of Nigeria (CBN) stabilizes the value of the Nigerian currency using "buy backs" of treasury bills previously sold to banks in Nigeria.
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Why is it important?
This study provides a framework for determining whether there exists some systematic strategy or mechanism for maintaining currency valuations in countries whose currency valuations are not determined entirely by the forces of demand and supply. Strategies for the maintenance of currency valuations can be proactive or reactive. In the case of Nigeria, the results provide evidence of a reactive or reactionary approach to maintenance of currency valuations. During the period covered by this study, the Central Bank of Nigeria focused on reining in risk that would lead to currency depreciation, resulting in a private sector led economy, as opposed to a relatively more planned public sector led economy. In so far as Nigeria is concerned, such a reactionary stance is expected to be beneficial for investor confidence. A study which establishes this reactionary stance has been beneficial for investor confidence is available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2493651
Perspectives
The framework I develop in this paper enables a better understanding of how Central Banks within countries that run hybrid exchange rate regimes attempt to achieve price stability within an economy, resulting in improvements in understanding of monetary policy ideology. An understanding of monetary policy ideology is crucial for assessing the effectiveness, credibility, or appropriateness of monetary policy. Stated somewhat differently, the framework I develop in this study enables an understanding of the process via which monetary equilibriums are achieved within an economy.
Dr Oghenovo A Obrimah
Fisk University
Read the Original
This page is a summary of: Private Sector Profitability and Depreciation Pressure within Managed Floating Exchange Rate Regimes: Evidence from Nigeria, SSRN Electronic Journal, January 2014, Elsevier,
DOI: 10.2139/ssrn.2475527.
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