Testing for explosive behavior in relative inflation measures: Implications for monetary policy under uncertainty

Jamilu Iliyasu (), Aliyu Sanusi and Suleiman Mamman
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Jamilu Iliyasu: Department of Economics, ABU Business School, Ahmadu Bello University, Nigeria

Economics Bulletin, 2023, vol. 43, issue 2, 934 - 947

Abstract: This study sets out to examine the explosive behaviour of relative inflation measures and its effects on consumers' inflation expectation as well as on the efficacy of monetary policy under uncertainty. To achieve these objectives, we applied the Generalised Sup Augmented Dickey-Fuller (GSADF) test to Nigeria's data on aggregate consumer price index (CPI) and its energy, food & “core” components over the period 1995-2020. In the case of energy price, food price and aggregate price, four (4), two (2) and two (2) episodes of explosive behaviours were identified relative to core items. Two of these episodes correspond to the 2016 recession and COVID-19 economic lockdown. It was found that under explosive regimes, inflation expectations were significantly affected, and consumers had become increasingly uncertain about the impact of monetary policy on inflation. One implication of these findings is that because the explosive nature of relative inflation is found to be a determinant of inflation expectation, considering the explosiveness of relative inflation may be an important input to monetary policy decisions. Therefore, we recommend that Central Bank of Nigeria should consider explosiveness in relative inflation measures to determine the best instrument for managing inflation.

Keywords: Inflation; Expectations; Uncertainty; COVID-19; Monetary Policy; Central Bank; GSADF (search for similar items in EconPapers)
JEL-codes: E3 E5 (search for similar items in EconPapers)
Date: 2023-06-30
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