Many developing countries are facing high inflation, and the central banks in these countries have adopted several solutions to tame rising inflation. Nigeria transitioned to an inflation targeting monetary policy framework in late 2023 from a monetary targeting monetary policy framework. There is high prospect that the inflation targeting monetary policy framework will tame high inflation in Nigeria. This study identifies the important success factors for an effective inflation targeting monetary policy framework in Nigeria. The identified success factors include the size of economic agents monitoring the inflation target, the credibility of the central bank, the degree of central bank independence, reduction in budget deficit, limited dollarization of the Nigerian economy, effective central bank communication, avoidance of fiscal dominance, financial development, greater financial inclusion, financial stability, and insecurity caused by farmer-herder clashes and terrorism.
Top1. Introduction
This study identifies the success factors for an effective inflation targeting monetary policy framework in Nigeria.
The goal of most central banks is to achieve price stability which is generally interpreted as low inflation. Inflation is a general and persistent increase in the price of goods and services in an economy (Barro, 1996). Many central banks have adopted an inflation targeting monetary policy framework and have made the inflation rate the most superior objective of monetary policy.
The literature document some motivations for adopting an inflation targeting monetary policy framework (Bernanke and Mishkin, 1997; Svensson, 1997). For instance, a central bank may adopt an inflation targeting monetary policy framework when it wants to refocus on price stability as the primary goal of monetary policy (Svensson, 1999), or when it wants to avoid potential loss of credibility from frequent changes to monetary aggregates (Neuenkirch and Tillmann, 2014), or when it wants to provide an anchor for inflation expectations (Bundick and Smith, 2018). Other advantages of an inflation targeting monetary policy framework include a low and less variable inflation rate and interest rate, stable economic growth, and greater ability to respond to shocks without losing credibility (Mishkin, 2000; Bernanke, 2003). Adopting an inflation targeting monetary policy framework may yield significant economic benefits in developing countries that are facing high inflation, large external shocks and are facing difficulties in designing sound domestic macroeconomic policies (Lin and Ye, 2009; Thornton, 2016).
Nigeria recently adopted an inflation targeting monetary policy framework. In late 2023, the central bank transitioned to a floating exchange rate system and adopted an explicit inflation targeting monetary policy framework which allows the Nigerian central bank to set an inflation target for the coming quarters or year and use its monetary policy instruments to meet the inflation target while taking into account the lags between policy decisions and their effect on output and prices. It is important to understand how inflation targeting monetary policy framework might work in Nigeria and the factors that determine its success.
This study contributes to the monetary policy literature in several ways. It contributes to the economic literature that examine the efforts of developing countries to combat high persistent inflation (Vega and Winkelried, 2005; Taylor, 2019). This study contributes to the literature by analyzing the case of Nigeria which recently adopted an inflation targeting monetary policy framework to combat high inflation. The study also contributes to the literature that explore several monetary policy frameworks for controlling inflation (e.g., Dua, 2023; Bianchi et al, 2021). This study focuses on a specific type of monetary policy framework which is the inflation targeting monetary policy framework.
The remainder of this study is structured as follows. Section 2 presents an overview of the monetary policy framework in Nigeria. Section 3 presents the literature review. Section 4 presents the success factors affecting the inflation targeting regime. Section 5 concludes.