Inflation Targeting, Economic Stability and Monetary Policy:The Nigeria Experience

Abstract

Since the late 1990s, a good numbers of emerging-market countries have adopted inflation targeting (IT) as a monetary policy framework. The hallmarks of this approach are an explicit commitment by the central bank to keep an inflation index close to a Periodically-adjusted target, and the use of an inflation forecast as the intermediate target for policy. In view of this, the study examined how likely inflation targeting will respond to monetary policy in Nigeria. To achieve the objective we used time series data that span from 1985 to 2015 on inflation, exchange rate, prime lending rate, Income (GDP) and money supply to estimate an Autoregressive Distributed Lag Model of inflation. The finding shows that monetary variables are good explanatory variables in explaining the changes in inflation on Nigerian economy and also the first and second lagged of Money supply exert a very high significant influence on the growth of inflation in Nigeria. We recommend the consideration of effective management of money supply, interest rate and exchange rate to ensure stability as a precondition for the achievement of inflation targeting.

Keywords: Inflation targeting, economic stability, monetary policy, Nigeria