Asekunowo1 this study sought to identify the traditional and institutional inflation variables responsible for inflation phenomenon and the magnitude of the contribution of the identified variables to the rise in general price level. A proposed programme for implementation by the central bank of nigeria 3 provide an input into addressing these issues, especially as regards resolving the technical, administrative and practical problems for a transition to inflation targeting as a framework for monetary policy in nigeria. Proposed inflation targeting or mistargeting in nigeria. This is under debate within the fed, since inflation targeting is usually very successful in other countries because of its transparency and predictability to the.
Evidences have shown that inflation targeting frameworks have often been adopted in even economies without a history of stable inflation. Keywords interest rate, inflation, economic growth. Dada8 abstract9 monetary policy in nigeria has faced severe challenges with little success. The central banks of the two largest economies, the us and japan, have so far resisted calls for its adoption, although it is used by the 12 nation eurozone, where the. Inflationtargeting, flexible exchange rates and macroeconomic performance since the g reat recession 3 some caveats are in order concerning the extent to which our findings lend themselves to generalisations.
Frederic mishkin and adam posen 1997, and in ben bernanke, thomas laubach, frederic mishkin and adam posen 1999, inflation targeting central banks have frequent communications with the government, and their officials take every opportunity to make public speeches on their monetary policy strategy. Nigeria crawled into 2009 with double digit inflationary rate, as concerns mount that the regulatory authorities are failing the economy. Inflation targeting encompasses a monetary policy framework in which the central bank sets an explicit target for future inflation, usually low inflation rate, and work towards achieving this goal. Inflation targeting framework for monetary policy in nigeria. E5, f33, o54 abstract the paper looks at the evolution of monetary policy in industrialized countries by evaluating two monetary policy strategies, monetary targeting and inflation targeting. The assumption is that the best that monetary policy can do to support longterm growth of the economy is to maintain price stability, and price stability is achieved by controlling inflation. Kumo is country economist, at the african development bank, south africa regional office, pretoria. Inflation targeting is a monetarypolicy strategy that is characterized by an. Rather some products may experience stable prices while.
Thus, ensuring price stability through inflation targeting is. Nov 20, 2019 nigerias inflation has been higher than the average for african and subsaharan countries for years now, and even exceeded 16 percent in 2017 and a real, significant decrease is nowhere in. Flexible inflation targeting, forecast targeting, optimal monetary policy. There is evidence of growing concern regarding south africas. Though inflation rate is not new in the nigerian economic history, the recent rates of inflation have been a cause of great concern to many. Adopting inflation targeting for monetary policy semantic scholar. Nov 18, 2014 inflation is defined as a general and persistent tendency for prices to increase. Inflation targeting monetary policy and output in nigeria eme a. It intends to examine the impact of inflation targeting on economic growth in nigeria, within the period.
According to mordi 2009, monetary policy is a blend of measures and, or a set of instruments designed by the. This paper evaluates whether nigeria is ready to adopt inflation targeting it, a monetary policy. E31,e52,e58 abstract yes, as inferred from panel evidence for inflationtargeting countries and a control group of highachieving industrial countries that do not target inflation. Inflation can only be reduced to the barest minimum by increasing output level gdp. The most important issues on inflation targeting centered on the notion of preconditions for adopting inflation targeting across countries in the. Inflation targeting is more likely to improve economic performance in countries that choose to have an independent domestic monetary policy, but there are subtleties in how inflation targeting is done. Advantages and disadvantages of inflation targeting 12 2. Inflation targeting in nigeriaenglama munich personal repec. This attempt is to achieve counter cyclical policy objectives like the level of inflation, a reasonable level of price stability, an equitable distribution of income and wealth, a favourable balance of payments and acceptable rate of economic growth and development among others. Pdf this paper calculates indices of central bank autonomy cba for 163 central. Indeed, inflation targeters have argued that symmetrical inflation targeting helps central banks to stabilize real output, because in the face of a weak economy, an inflation targeter can ease more aggressively without being worried that the easing will cause inflation expectations to rise. If inflation is higher than 5 percent, a pensioners purchasing power falls.
On the other hand, a borrower who pays a fixedrate mortgage of 5 percent would benefit from 5 percent inflation, because the real interest rate the nominal rate minus the inflation rate would be zero. In a capitalist economy, monetary aggregate policy instruments are normally employed by monetary authorities. As the economy grows and transforms, the current framework of monetary aggregate we are using becomes obsolete. Inflation targeting and real exchanges in emerging markets.
Inflation targeting monetary policy, inflation volatility and economic growth in south africa wolassa l kumo1 1 wolassa l. Since mid 1960s, inflation has become so serious and contentions a problem so serious and contentious a problem in nigeria. The extent to which it does so in part reflects some design features of the inflationtargeting framework, such as targeting bands and the policy horizon, that have been adopted in practice in the inflationtargeting. The first parts of the work, essentially descriptive, have endeavored to discuss the various operational aspects of monetary policy, and the terms of its effectiveness and viability. Thus, the study seeks to explore the interrelationship between inflation, savings and output in nigeria using a vector autoregression var approach. Statement of the problem since mid 1960s, inflation has become so serious and contentions a problem so serious and contentious a problem in nigeria. Inflation targeting is a monetary policy strategy in which central bank estimates and makes public a target inflation rate and then, attempts to steer actual inflation towards the target through the use of other key macroeconomic variables such as interest rate changes and other monetary tools. Therefore, it is possible that the impact of inflation targeting on inflation and on other macroeconomic variables may arise through its effects on inflation expectations and on the expectationsformation process. Pdf volatility in prices is a huge economic challenge, able to engender instability and topple economies. Inflation is defined as a general and persistent tendency for prices to increase. Pdf is nigeria ready for inflation targeting semantic. Bank of nigeria has been contemplating switching to inflation targeting as a monetary policy framework.
Inflation targeting with dynamic time series modelling the nigerian case olanrewaju i. Nigeria was said to have indicated her interest to adopt the inflation targeting it. Argentine central bank adopts inflationtargeting regime. Inflation targeting has been adopted in a number of. National bank of rwanda governor, john rwangombwa says the inflation targeting is a modern policy framework. Merits of inflation targeting in south africa 16 2. In 1990s, after the failure of monetary and nominal exchange rate targeting to reduce inflation rates, inflation targeting it is implemented successfully in some developed countries, which encouraged developing and transition countries fighting against the. Monetary aggregate targeting and inflation in nigeria.
Appropriateness of inflation targeting in south africa. New cbn study discredits inflation targeting model for. Forwardlooking variables and imperfect information using matlab, toolkit manual. E42,e43,e47,e52,e58 abstract inflation targeting is a monetarypolicy strategy that is characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast and has.
This study indicates that inflation targeting is an appropriate framework for monetary policy, particularly when there is a dire need for reducing high and volatile inflation. Thus nigeria navigated towards adoption of it monetary policy framework. This definition does not mean all prices are rising. Inflation targeting has no significant impact on the economic growth in nigeria. Oconnell1 january 4, 2010 in an inflation targeting it framework, the central bank commits to a publicly announced numerical range for inflation, subordinates other intermediate targets, and institutionalizes its commitment through a set of mechanisms that emphasize. In discussing operational design, the author explains, among other things, that. Typically, inflation targeting requires five key elements including a sivak, 20. Journal of economics and sustainable development issn 22221700 paper issn 22222855 online vol. Most it central banks have defined the target in terms of the 12month, pointtopoint rates of change in the cpi. Though inflation rate is not new in the nigerian economic history, the recent. Inflation targeting in emerging market countries frederic s. Inflation targeting goes naturally hand in hand with an intensification of academic research about it. Inflation targeting has become the dominant monetary policy prescription for developing and industrialized countries alike.
Inflation targeting is a monetary policy framework in which the central bank announces an explicit inflation target and implements policy to achieve this target directly. The initial target measure was the cpix, which was defined as the consumer price index for metropolitan and other urban areas, excluding the interest cost on mortgage bonds. Inflation targeting has successfully controlled inflation, with some qualifications. Inflation targeting is consistent with democratic principles. The appropriateness of inflation targeting in south africa is examined. One of the features of an inflation targeting framework is the greater degree of transparency it brings to monetary policy. It can promote growth and does not lead to increased fluctuations in output. It has been defined as a framework of monetary policy which consists in announcing an inflation target in advance to the public. Many of the countries studied proved that inflation targeting had made a positive difference to their economies. Even in this strand of the literature there is mixed evidence over whether formal adoption of an inflation targeting regime in advanced industrial economies substantively changes the. Nigerias inflation has been higher than the average for african and subsaharan countries for years now, and even exceeded 16 percent in 2017 and a real, significant decrease is nowhere in. In south africa, formal inflation targeting was adopted by south african reserve bank sarb in the february of 2000, with an objective of maintaining cpix 1 inflation between the targetband of 3 percent to 6 percent by 2002, using discretionary changes in repurchase repo.
Monetary policy instruments, target and goals 6 list of figures figure 1. Inflation targeting, as a formal monetary policy regime, was first introduced in new zealand in 1990 and has since been adopted by numerous countries around the world. Inflation targeting, employment creation and economic development. Inflation targeting, employment creation and economic. The beginning of inflation in nigeria can be said to be a direct result of policies of the countrys governments to stimulate a fast rate of economic growth and development since 1951 when ministerial government was introduced anyanwu, 1993. D department of financial management technology fmt school of management technology.
Inflation targeting framework providesinflation targeting framework provides clear guidelines for unconventional lidlif tilg monetary policymonetary policy. Public announcement of mediumterm numerical targets for inflation. 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. Inflation targeting is a monetarypolicy strategy that is characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast and has been called forecast targeting, and a high degree of transparency and accountability. Even with so many reforms in the central bank and the national bureau of statistics, timely and reliable data availability remains an issue in nigeria. South africa, as well as brazil, mexico, and the philippines, all adopted inflation targeting around the turn of the century, and other countries, such as colombia began implementing monetary policy using the interest rate instrument in a rulelike manner similar to many other inflation targeting countries. The assumption is that the best that monetary policy can do to support longterm growth of the economy is to maintain price stability.
Inflation targeting framework south african reserve bank. South africa has adopted flexible inflation targeting, wherein considerations for other macroeconomic variables are prioritized. Relevance of inflation targeting for developing countries. Inflation targeting was first used by the reserve bank of new zealand in 1990 and since then it has been adopted by more than a score of both developed and developing countries. One of the features of an inflationtargeting framework is the greater degree of transparency it brings to monetary policy. Lessons from industrial countries should be useful to central banks designing a. The inflationtargeting framework has sufficient flexibility to allow for the shortrun tradeoff between output and inflation. Unlike the 2008 that was ushered in with a singledigit. Second, nigeria is absent from the list of countries that have adopted inflation targeting as a monetary policy framework, while south africa and ghana are the only countries in africa that have adopted inflation targeting. Thus, ensuring price stability through inflation targeting is a legal responsibility of rbi since 2016. Rwanda central bank to target inflation in monetary policy. Mishkin and klaus schmidthebbel nber working paper no. This paper investigates the impact of inflation targeting monetary policy and inflation volatility on. A proposed programme for implementation by the central bank of nigeria 18.
Albania joining the inflation targeting group in 2009, there were already 28. Scope of the study this project covers a period of 21 years, that is from 1980 to 2011. Inflation targeting and economic growth nexus in nigeria. Inflation targeting monetary policy, inflation volatility and economic. Initially adopted by new zealand in 1990, the norms surrounding the inflation targeting regime have. Features of inflation targeting as a type of monetary strategy 41 state a desired target range for inflation usually around 1. Lessons from the industrialized countries frederic s. Inflation targeting is a monetary policy where a central bank follows an explicit target for the inflation rate for the mediumterm and announces this inflation target to the public. It weakens the effects of inflationary shocks, as examples from canada, sweden, and the united kingdom show. Yemitan abstract in recent times, inflation figures used by policy makers and investors are usually at lag one i.
Management of monetary policy and the express objective of inflation targeting has been enshrined as the responsibility of rbi by amending the preamble of the rbi act, 1934 through the finance act 2016 chapter xii. Central bank news publishes inflation targets for central banks as a complement to the global interest rate monitor girm. Inflation targeting monetary policy, inflation volatility. Generally, inflation targeting is a policy in which an estimated inflation target is made public and deliberately pursued using the instruments of monetary management such as interest rate to steer actual inflation towards the desired policy target. Inflation targeting, performance, emerging markets, policy introduction since the early 90s, a new monetary policy, called inflation targeting it policy, has been adopted. Effect of inflation on the growth and development of the. Looking at a short and extraordinary period of five years is risky if one.
Argentine central bank adopts inflationtargeting regime september 27th 2016 argentina financial markets and instruments. Inflation targeting as a monetary policy in nigeria semantic scholar. E5, f33, o54 abstract the paper looks at the evolution of monetary policy in industrialized countries by evaluating two monetary policy. Inflation targeting monetary policy, inflation volatility and. Formal inflation targeting is still uncommon in african countries, with only south africa and ghana having officially adopted the framework at the current time. Price stability is a common goal for central banks with some inflation targets set by governments while other targets are set by central banks. For example, while most inflationtargeting central banks use a shortterm interest rate as their instrument, inflation targeting can also be implemented using the reserve money instrument currently employed by the cbn. The country has been using a monetary targeting framework and, in a few cases, a fixed exchange rate framework. The causes of persistent inflation in nigeria victor o. Macroeconomic policy has many goals low inflation high real growth low unemployment financial stability a consensus is emerging that price stability must be the primary long run goal of monetary policy.
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