Inflation Targeting as a Possible Monetary Framework for Nigeria

One of the issues facing Nigeria today is the choice among two nominal anchors: exchange rate pegging or inflation targeting. The incessant increase in interest rates, exchange rates, money supply and domestic credit have all accumulated, leading to persistent inflation in Nigeria. At this instant, it is pertinent to look for another nominal anchor to keep inflation in check because the present exchange rate pegging seems useless. This groundbreaking study, in an effort to do this, examines inflation targeting as a possible monetary framework for Nigeria, using time series data and with the aid of Granger Causality test and impulse response functions. The empirical results show evidence that inflation is highly sensitive to exchange rate and interest rate while economic growth is highly sensitive to exchange rate and inflation in Nigeria. Further, the causation from real exchange rate to economic growth is stronger than the causation from inflation to economic growth, meaning exchange rate determines economic growth in Nigeria more than inflation does. Therefore, inflation targeting will be less preferable to exchange rate targeting in Nigeria as a policy alternative. This unexpected finding has important implications for monetary policy conduct in Nigeria