Modelling macroeconomic trilemma and central bank behaviour in Nigeria: a Markov-switching approach

This study investigates macroeconomic trilemma and central bank behaviour in Nigeria. The period of investigation spans the quarterly period of 1981–2017. Upon the data stability condition of Zivot-Andrew unit-root test with structural breaks, the Markov-switching dynamic regression was employed as the technique of analysis. With a validated trilemma hypothesis, the study found that the trilemma constraints hold for the Nigerian economy but at the expense of the autonomy of the monetary authority. Being the policy variable of the Central Bank of Nigeria, the exchange rate was found to follow two regimes of fixed and managed-float regimes. The results also showed that political risk was significantly sensitive to both regimes of exchange rate, while the foreign interest rate and the net export led to exchange rate appreciation under the managed-float regime but depreciation under the fixed regime. The study recommends that the foreign sector be made competitive for proper exchange rate management, while impulses from the political institutions should be put under check.