Macroeconomic Effects of Central Bank Independence and Transparency: The case of Nigeria.

Abstract

As the Nigerian economy tend towards democracy, the search began for how to establish monetary institutional policies that can be viewed as credible commitments. There is the notion that Central Banks in democratic economies have the likelihood of higher inflationary bias than other economies. Delegation of monetary policy to an independent central bank seem to be a good option for these economies. Thus, since then, greater independence became the practice across all groups of countries, but has been particularly marked for developing and emerging market economies. Transparency has been a good ingredient of Independence. Authors have not been able to conclude on the impact of these on macro economic variables, especially in the less developed countries where democracy is gaining ground and most government are trying to use monetary policies to support their government and administration. Against this background, this paper investigated the impact these two variables will have on many macroeconomic variables in these countries taking Nigeria as a case study. Indices of these variables were calculated and their impact was investigated on selected macroeconomic variables. The findings revealed that CBN independence and transparency means more employment for the Nigerian economy. It has negative effect on inflation and interest rate. The finding that increased independence lead to low interest rate is particularly very important for the growth of the economy.

Keywords: Central bank independence, Inflation Targeting, Transparency, Monetary policy.