Determination of the optimal exchange rate via control of the domestic interest rate in Nigeria

• Authors: Virtue U. EKHOSUEHI , Sunday M. OGBONMWAN
• Languages of publication: EN

Abstracts

EN

An economic scenario has been considered where the government seeks to achieve a favourable balance-of-payments over a fixed planning horizon through exchange rate policy and control of the domestic interest rate. The dynamics of such an economy was considered in terms of a bounded optimal control problem where the exchange rate is the state variable and the domestic interest rate is the control variable. The idea of balance-of-payments was used as a theoretical underpinning to specify the objective function. By assuming that, changes in exchange rates were induced by two effects: the impact of the domestic interest rate on the exchange rate and the exchange rate system adopted by the government. Instances for both fixed and flexible optimal exchange rate regimes have been determined. The use of the approach has been illustrated employing data obtained from the Central Bank of Nigeria (CBN) statistical bulletin.

Keywords

EN

balance-of-payments; domestic interest rate; exchange rate; optimal control theory; statistical control

• Publisher: Politechnika Wrocławska. Oficyna Wydawnicza Politechniki Wrocławskiej
• Journal: Operations Research and Decisions
• Year: 2014
• Volume: 24
• Issue: 1
• Pages: 23-36

Contributors

author

Virtue U. EKHOSUEHI

• Department of Mathematics, University of Benin, P.M.B. 1154, Benin City, Nigeria

author

Sunday M. OGBONMWAN

• Department of Mathematics, University of Benin, P.M.B. 1154, Benin City, Nigeria

References

• AKINLO A.E., Exchange rate depreciation and currency substitution in Nigeria, African Review of Money, Finance and Banking, 2003, 139–143 (accessed: 28/03/2013 from <http://www.jstor.org>).
• BESANCENOT D., VRANCEANU R., Financial instability under a flexible exchange rate, The Scandinavian Journal of Economics, 2006, 109 (2), 291–302.
• BINICI M., CHEUNG Y.-W., Exchange rate dynamics under alternative optimal interest rate rules, CESifo working paper. Monetary Policy and International Finance, 2011, 3577, 1–43.
• CADY J., GONZALEZ-GARCIA J., Exchange rate volatility and reserves transparency, IMF Staff Papers, 2007, 54 (4), 741–754.
• CALIENDO F., PANDE S., Fixed endpoint optimal control, Economic Theory, 2005, 26 (4), 1007–1012 (accessed: 02/09/2009 from <http://www.jstor.org>).
• CHEN Y-C., TSANG K.P., A macro-finance approach to exchange rate determination, Hong Kong Institute for Monetary Research, Working Paper, 2011 (1), 1–46.
• DOONTCHEV A.L., HAGER W.W., The Euler approximation in state constrained optimal control, Mathematics of Computation, 2001, 70 (233), 173–203.
• EKHOSUEHI V.U., OSAGIEDE A.A., A proposed formula for horizontal revenue allocation in Nigeria, Asia-Pacific Journal of Operational Research, 2012, 29 (6),1250033-1-16.
• FEICHTINGER G., HARTL R.F., SETHI S.P., Dynamic optimal control models in advertising: Recent developments, Management Science, 1994, 40 (2), 195–226.
• IMIMOLE B., ENOMA A., Exchange rate depreciation and inflation in Nigeria (1986–2008), Business and Economics Journal, 2011, 28, 1–12.
• IYOHA M.A., An overview of leading issues in the structure and development of the Nigerian economy since 1960, [in:] Nigerian Economy: Structure, Growth and Development. Mindex Publishing, M.A. Iyoha, C.O. Itsede (Eds.), Benin City 2002, 3–28.
• IYOHA M.A., Macroeconomics: Theory and policy, Mindex Publishing, Benin City 2004.
• KAMIEN M.I., SCHWARTZ N.L., Dynamic optimization: The calculus of variation and optimal control in economics and management, 2nd Ed., Elsevier, Amsterdam 1992.
• LINDGREN B.W., Statistical theory, 4th Ed., Chapman & Hall, New York 1993.
• MUSSA M., The theory of exchange rate determination, [in:] Exchange Rate Theory and Practice, J.F.O. Bilson, R.C. Marston (Eds.), University of Chicago Press, Chicago 1984, 13–78.
• SANIGA E.M., Economic statistical control-chart designs with an application to X and R charts, Technometrics, 1989, 31 (3), 313–320.
• STEPHENSON G., Mathematical methods for science students, 2nd Ed., Longman Singapore Publishers, Singa, Vanguard 2011–2013, accessed: 01/07/2013 from <http://www.vanguardngr.com>.

Identifiers

DOI

10.5277/ord140102