Evaluating the Responses of Monetary Policy Variables to Shocks in Capital Inflows in Nigeria

The reactions of monetary authorities in the face of fluctuating capital inflows have occupy the attention of monetary economists and other researchers in financial related fields in recent times. This study investigated the responses of monetary policy variables to shocks in capital inflows in Nigeria. The study covered the period from 2007M1 to 2021M9 using the Vector Autoregressive (VAR) approach. Results of the impulse response function reveal that the broad money supply (M2) responded positively to shocks in capital inflows (proxy by NFA) in all the quarters, while the cash reserve requirements (CRR) responded positively to shocks in capital inflows only in the first quarter. Finding equally reveals that the monetary policy rate (MPR) exhibited a positive response due to shocks in capital inflows, while the response of exchange rate to shocks in capital inflows was positive in all the quarters. In another respect, capital inflows was found to respond positively to shocks in the MPR in the first quarter, negative up to the second quarter and thereafter it responded positively in all the other quarters. The results of the variance decomposition lend further credence to the response of the monetary policy variables to shocks in capital inflows. The study concludes that while monetary policy variables reacted expectedly to shocks in capital inflows within the study period, a reverse causality existed between capital inflows and monetary policy variables. The implication of the finding is that even though monetary policy variables could be effective in reducing the monetary impact of capital inflows, their implementation may end up producing unintended results.