Monetary Policy-Making in Nigeria: Does evidence support augmented Taylor Rule?

This paper relies on the augmented Taylor rule to evaluate the reaction function of the historical path of nominal monetary policy rate in Nigeria in the period 1996:Q1-2014:Q4. The main technique of analysis is the GMM econometric approach and the reaction function is augmented with the real exchange rate. Evidence from the study suggests that the real output and exchange rate are both significant in explaining the path of monetary policy rate while the inflation variable was not statistically significant. Monetary policy reacts negatively to lagged real exchange rate and current real exchange rate but positively to lagged real output gap. We conclude that lag of real exchange rate has a greater effect on the policy rate consequently inflation targeting is not a primary objective of the CBN. Based on economic theory, the study recommends the adoption of Taylor rule because findings from such rule based approach can be used to stabilize output and inflation in Nigeria