Examining the Feasibility of inflation targeting approach as a monetary policy framework in Nigeria

Abstract

This study evaluates the feasibility of the adoption of the inflation-targeting approach to monetary policy in Nigeria. In this bid, the paper relied on literature on selected conditions needed for a successful implementation of IT. The study evaluated some of the necessary preconditions for IT, particularly the autonomy in decision-making conditions, the absence of fiscal dominance, as well as empirically testing the preconditions that necessitates the need for a predictable relationship between inflation and monetary policy variables. To empirically test the relationships, we utilized the vector autoregressive (VAR) estimation technique, as well as a granger causality test to examine the nature of the relationship between the variables. The estimation results show that fiscal spending shock has the highest percept of innovations in actual inflation, followed by money supply (M2) in the system. Also, the causality test reveals that fiscal spending causes persistent price increase in Nigeria, thereby suggesting the possible limitations for monetary policy tools in attaining the price stability objective of the Central Bank of Nigeria. Therefore, the study recommends the implementation of inflation targeting in Nigeria, as an optimal monetary policy framework.