RESPONSE OF MONETRAY POLICY TO INFLATION PERSISTENCE IN NIGERIA

Abstract

This study uses monthly data covering the period January, 2007 – September, 2018 to examine the response of monetary policy to inflation persistence in Nigeria. Persistence in three inflation indicators (core inflation, food inflation and headline inflation) were estimated using the univariate structural time series model (STSM) and Bayesian vector autoregressive (BVAR) model and the results were compared. Findings from the results of analysis reveal evidence of high inflation persistence in Nigeria over the study period. This was confirm by the calculated BVAR coefficients of inflation which stood at 0.91 and 0.97 for headline and core inflations respectively and STSM coefficients, standing at 0.96 and 1.1 for headline and food inflations respectively. The study concludes that high persistence in inflation in Nigeria had defied CBN’s monetary policy measures as well as the efficacy of monetary policy in managing the economy. High persistence in food inflation may imply that inflation in Nigeria is more of a cost-push than demand-pull. Given that inflation in Nigeria is more of cost-push than demand-pull, the study recommended the coordination of fiscal and monetary policies to check the rising inflationary trend in the country. The fiscal policy may focuses on increasing investment in infrastructure and agriculture in order to reduce the cost of food, transport and energy. The monetary policy may focuses on policies that allowed producers access to foreign currency and also put a check on the activities of the parallel market.

Keywords: Inflation persistence, STSM, BVAR