Title: Inflation Targeting as a Possible Monetary Framework for Nigeria
Abstract: ABSTRACTOne of the issues facing Nigeria today is the choice among two nominal anchors: exchange rate pegging or inflation targeting. The incessant increase in interest rates, exchange rates, money supply and domestic credit have all accumulated, leading to persistent inflation in Nigeria. At this instant, it is pertinent to look for another nominal anchor to keep inflation in check because the present exchange rate pegging seems useless. This groundbreaking study, in an effort to do this, examines inflation targeting as a possible monetary framework for Nigeria, using time series data and with the aid of Granger Causality test and impulse response functions. The empirical results show evidence that inflation is highly sensitive to exchange rate and interest rate while economic growth is highly sensitive to exchange rate and inflation in Nigeria. Further, the causation from real exchange rate to economic growth is stronger than the causation from inflation to economic growth, meaning exchange rate determines economic growth in Nigeria more than inflation does. Therefore, inflation targeting will be less preferable to exchange rate targeting in Nigeria as a policy alternative. This unexpected finding has important implications for monetary policy conduct in Nigeria.JEL: E31, E52, E44, E58KEYWORDS: Inflation Targeting, Monetary Policy, Inflation(ProQuest: ... denotes formulae omitted.)INTRODUCTIONInflation targeting, as an economic policy, is an attempt to direct inflation towards an expected, or inflation rate using monetary tools such as interest rate changes (Coy, 2005). Under the policy, the actions of the central bank become more transparent. Investors, knowing what the central bank estimates as the target inflation rate, can easily factor in possible interest rate changes in their investment sets, leading to better economic stability. One of the issues facing Nigeria today is the choice among two nominal anchors: exchange rate pegging or inflation targeting. Volatility in price and hyperinflation are huge economic challenges, able to create financial instability and tumble economies. Many industrialized economies, after experiencing persistent inflation rates for decades, have reduced inflation to extremely low levels recently with the aid of inflation targeting. Nigeria can do the same. In fact, inflation targeting frameworks have regularly and successfully been adopted in economies suffering from chronically high inflation. Can inflation targeting regime work effectively in Nigeria which employs the exchange rate stability objectives? Bakradze and Billmeier's (2007) study observed that the rising number of countries embracing inflation targeting and its success are inducements for countries that employ monetary or exchange rate targeting to consider a change to inflation targeting.Thus, countries like Nigeria need to consider earnestly such a change now or in the near future, bringing us to the question if Nigeria is ready for inflation targeting now, later or maybe never. According to Mishkin (2000), for inflation targeting to successfully raise output growth, lower unemployment, increase external competitiveness - through monetary policy, there must exist a strong commitment to make price stability the primary goal of the central bank. This is particularly important in an emerging market country such as Nigeria which has often had a past history of monetary mismanagement. Table 1 and Figure 1 show the evolution of the monetary policy outcomes in Nigeria from 2005 till 2012. It shows the quantum of monetary policy in Nigeria. Price stability is not accorded the highest in Nigeria, to the detriment of the aforementioned institutional commitment to price stability which requires that the central bank be given a mandate to have price stability as its primary goal, making it clear that when there is a conflict with other goals, such as exchange rate stability or promotion of high employment, price stability should be accorded the highest priority (Mishkin, 2000, pp. …
Publication Year: 2015
Publication Date: 2015-09-01
Language: en
Type: article
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Cited By Count: 3
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