Is Nigeria Ready for Inflation Targeting?

Shehu Aliyu and Abwaku Englama

MPRA Paper from University Library of Munich, Germany

Abstract: This paper evaluates whether Nigeria is ready to adopt inflation targeting (IT), a monetary policy framework that several emerging markets have adopted over the last one decade. The paper reviewed literature on selected conditions for successful implementation of IT and then focused on whether one specific precondition of an empirically stable monetary transmission mechanism is tenable. Vector autoregressive (VAR) model was applied using select monetary policy and other macroeconomic variables to explore the various channels using the Granger causality tests, impulse responses, and variance decompositions. Results showed that inflation in Nigeria is impassive to monetary transmission variables in the model. Specifically, weak link between prices and credit and interest rate channels were established. However, evidence of strong inverse link between exchange rate and prices was found in the model. This suggests exchange rate pass-through on the level of prices in the economy. The paper, therefore, recommends the pursuance of IT lite in Nigeria.

Keywords: Inflation targeting; vector autoregressive model; Granger causality test; monetary transmission mechanism; exchange rate pass-through (search for similar items in EconPapers)
JEL-codes: E31 E37 (search for similar items in EconPapers)
Date: 2009-01-03, Revised 2009-04-26
New Economics Papers: this item is included in nep-afr, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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