MONETARY POLICY SHOCKS, EXCHANGE RATE DEVALUATION AND INFLATION VOLATILITY IN WEST AFRICA MONETARY ZONES

This study analysed monetary policy shocks, exchange rate devaluation and inflation volatility in West Africa Monetary Zones with the main objective of examining the impact of each of monetary policy shocks, exchange rate devaluation and inflation volatility has on one another in West Africa Monetary Zones. Four hypotheses were formulated to guide the study. Data were sourced from the Central Bank of Nigeria statistical bulletins and World Bank data base. The study used Generalized Autoregressive Conditional Heteroskedasticity (GARCH) to model inflation volatility before carrying out system Generalized Method of Moments (system-GMM), GARCH analysis and Monte Carlo Simulations. From the results, monetary policy shocks, exchange rate devaluation and inflation volatility in Nigeria persist throughout the study period. The results further revealed that the Nigerian economy is inherently unstable and was characterised by pronounced macroeconomic fluctuations, which was induced mainly by external factors such as oil price fluctuations and the naira exchange rate in the focused period. The results of the BEKK (Baba, Engle, Kraft, and Kroner) parameter estimates show significant evidence of shocks and volatility transmission as well as spill overs in the economy. Invariably, monetary policy shocks, exchange rate depreciation and inflation volatility combine to generate instabilities in the economy in dynamic feedback pattern. The study concluded that interest rate, inflation rate, exchange rate and trade openness exert influence on the economic growth of Nigeria. Amongst others, the study recommended that government should develop effective export promotion strategies in order to encourage domestic industries to improve on their productivity level for both domestic consumption and exportation.