Monetary Policy Approach to Headline Inflation Control in Nigeria: Evidence from 1985-2018

International Journal of Research and Scientific Innovation (IJRSI) | Volume VII, Issue VII, July 2020 | ISSN 2321–2705

Monetary Policy Approach to Headline Inflation Control in Nigeria: Evidence from 1985-2018

Mercy Amalu Henry Ikechukwu¹, Agbasi Lucy O.², Ujam Oluchukwu Juliet³, Olife Loenard U. ^4
1Department of Banking and Finance, University of Nigeria Nsukka, Enugu State, Nigeria
^2,4Department of Banking and Finance, Enugu State Polytechnic, Iwollo, Enugu State, Nigeria
³Department of Accountancy, Federal Polytechnic Oko, Anambra State, Nigeria

Abstract — Monetary policy remains one of the channels for controlling high inflation. Effective control of headline inflation using monetary policy measures depends on the degree of relationship that exists between the variables. In the light of this, the paper explores the relation between monetary policy and headline inflation with the aim of determining the effectiveness of monetary policy measures in curbing high headline inflation in Nigeria. The series employed are stationary at level and first difference respectively, after testing them for unit roots using Phillips-Perron and Zivot-Andrews structural break consistent unit root tests. The study adopts the Autoregressive distributed lag (ARDL) approach, Bound test, and Error Correction Model (ECM) for empirical analyses of the variables. The paper establishes the following: (a) exchange rate and headline inflation share strong negative relation both in the short-term and long-term; (b) Treasury bill rate exerts statistically significant positive influence on inflation in the long-run; and (c) strong interaction exists between deposit rate and headline inflation in the short-run. We also find cointegrating relationships between monetary policy and headline inflation in Nigeria.

Keywords- Headline inflation, Monetary policy, Exchange rate, Deposit rate, and ARDL

I.INTRODUCTION

Inflation stability remains a major attribute of a stable, flourishing economy. One of the key responsibilities of monetary authorities across the world includes inflation control, and ensuring its sustenance over a long period. In Nigeria, the maintenance of general price level stability remains a major mandate of the Central Bank of Nigeria (CBN). High rates of inflation in Nigeria could be attributed to operations of poor fiscal/monetary policies, economic shocks (including, the recent ones), the import-dependent nature of the economy, and other socio-economic factors. The positive effects of the diversification policies of successive governments in Nigeria may not have started trickling in, that is, if the policies were effectively designed and executed. To adequately contain rising headline inflation in the country via monetary policy measures, the success of such inflation stability driven policies should depend on the degree of association between the former and the later. In the light of this, this paper investigates the relation between monetary policy and high headline inflation in Nigeria.

The Nigerian economy has undergone various downturns since the 1980s with spiraling inflation contributing to the economic upheavals. The monetary authority has, to a good extent, remained responsive to the economic dynamics of money supply and undue fluctuations in the general price level using different policy measures such as monetary targeting and inflation targeting. Rising headline inflation was serious prior to the global financial crisis of 2008 especially in the military era. More often than not, the CBN failed in some of its policy thrusts to maintain liquidity balance in the financial system, due to undue political interference from the military. Other factors that contributed to such poor outcomes of the monetary measures adopted in those years include, fiscal policy indisciplines, corruption and other macroeconomic policy inadequacies that characterized the military periods. In the 1990s, for instance, the country witnessed the highest inflation rates since her independence in 1960. With the exception of the military era that saw the imposition of the whims of the military leaders on the CBN as against the professional and competent conducts required of such essential monetary institution, the Bank has performed better in its management of liquidity and high headline inflation in the economy.

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