Acta Universitatis Danubius. Œconomica, Vol 12, No 5 (2016)

Abstract

A major challenge of monetary policy is the attainment of sustainable output level but in setting the optimal monetary policy rate information of the output gap but how uncertainty of the gap affects the path of monetary policy rate is crucial for policy use. The investigation of this phenomenon in Nigeria was mostly concerned with how monetary policy affects output. In view of the dearth of studies on uncertainty and monetary policy in Nigeria, this paper investigates the effect of output gap uncertainty on monetary policy rate in Nigeria-1991Q1-2014Q4. The paper relies on the New Keynesian economics and employs the GARCH-GMM econometric technique for analyses. Evidence from the study shows that real output gap and inflation uncertainty are statistically significant with estimated values of        respectively. The coefficient of the real output variable is significant with a coefficient estimate of    while we found no strong evidence to support the effect of inflation on monetary policy rate.  The inference from our findings is that monetary policy is less responsive to uncertainty of real output gap. We therefore recommend that the Central Bank of Nigeria should consider uncertainty of both inflation and output variables when setting the policy rate.