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Monetary Policy and Inflation Targeting in Nigeria: The Need for Monetary-Fiscal Coordination

Received: 27 September 2020     Accepted: 12 October 2020     Published: 21 October 2020
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Abstract

This paper examined the effectiveness of a monetary-fiscal coordination in inflation targeting in Nigeria for the period 1985 to 2019. The study got its inspiration from the monetarist assertion that inflation is strictly a monetary phenomenon. Data were obtained from the Central Bank of Nigeria statistical bulletin and the World Bank database on World Development Indicators. The study employed the Augmented Dickey-Fuller unit root test, ARDL bounds test for cointegration, and the Error Correction Mechanism (ECM). The unit root test revealed that the variables were stationary at mixed order of level I(0) and first difference I(1). This mixed order made us to employ the ARDL Bounds test for cointegration and the result indicated that there is a long run relationship. The Error Correction Mechanism revealed that 55.4% of the short run disequilibrium is corrected annually. Meanwhile, the study revealed that both monetary policy channels and fiscal policy significantly influence inflation both in the long run and in the short run. The paper concludes by stating that there is a need for a sound monetary-fiscal coordination in the Nigerian economy if the fight against inflation is to be won hence, inflation should not only be viewed as a monetary phenomenon.

Published in American Journal of Theoretical and Applied Business (Volume 6, Issue 3)
DOI 10.11648/j.ajtab.20200603.14
Page(s) 37-46
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2020. Published by Science Publishing Group

Keywords

Monetary-Fiscal Coordination, Inflation Targeting, Monetary Policy Rate, Liquidity Ratio, ECM

References
[1] Central Bank of Nigeria (2011). Inflation targeting as a monetary policy framework. Understanding monetary policy series No. 12.
[2] Batini, N. and Laxton, D. (2017). Under what conditions can inflation targeting be adopted? The experience of emerging economies.
[3] Masson, P. R., Savastano, M. and Sharma, S. (1997). The scope for inflation targeting in developing countries. IMF Working Paper No. WP/97/130, Washington, DC: IMF Research Department.
[4] Okwori, J. and Abu, A. (2017). Monetary Policy and Inflation Targeting in Nigeria. International Journal of Economics and Financial Management, 2 (3), 1–12.
[5] Aliyu, U. R. and Englama, A. (2009), “Is Nigeria ready for inflation targeting? Available online at http://mpra.ub.unimuenchen.de/14870/mprapaperNo.14870.pdf.
[6] Tolulope, A. O. and Ajilore, T. (2013). Inflation targeting monetary policy rule in Nigeria: Estimates of the policy reaction function. International Journal of Economics and Finance, 5 (7), 139–144.
[7] Central Bank of Nigeria (2019). CBN Statistical Bulletin. Abuja.
[8] Friedman, M. (1968), “The Quantity Theory of Money”. International Encyclopaedia of Social Sciences, London, Corwell Collier and Macmillan, Inc. Vol. 10.
[9] Mishkin, F. S. and Savastano, M. A. (2008). Monetary policy strategies for emerging market countries: Lessons from Latin America. Manuscript, Columbia University.
[10] Naraidooa, R. and Gupta, R. (2009). Modelling monetary policy in South Africa: Focus on inflation targeting era using a simple learning rule. University of Pretoria, Department of Economics Working Paper Series, Working Paper: 2009-04, January.
[11] Kadioglu, F., Ozdemir, N. and Yilmaz, G. (2009). Inflation targeting in developing countries. The Central Bank of the Republic of Turkey, Discussion Paper, September.
[12] Gerlach, S. and Tillmann, P. (2011). Inflation targeting and inflation persistence in Asia-Pacific. Hong Kong Institute for Monetary Research Working Paper No. 25/2011.
[13] Poon, W. C. and Kok, T. G. (2011). The feasibility of inflation targeting in Malaysia. Economics Bulletin, 29, 1036–1046.
[14] Danjuma, I., Jibrin, S. M. and Blessing, S. E. (2012). An assessment of the effectiveness of monetary policy in combating inflation pressure on the Nigerian economy. Erudite Journal of Business Administration and Management (EJBAM), 1 (1), 7–16.
[15] Chinaemerem, C. O. and Akujuobi, L. E. (2012). Inflation targeting and monetary policy instruments: Evidence from Nigeria and Ghana. Arabian Journal of Business and Management Review, 1 (11), 52–81.
[16] Odior, E. S. O. (2012). Inflation targeting in an emerging market: VAR and impulse response function approach. European Scientific Journal, 8 (6), 79–98.
[17] Maku, A. O. and Adelowokan, O. A. (2013). Dynamics of inflation in Nigeria: An autoregressive approach. European Journal of Humanities and Social Sciences, 22 (1), 1175–1184.
[18] Aigbedion, I. M. (2017). Inflation targeting as a monetary policy in Nigeria: An application of vector autoregressive (VAR) model. Journal of Economics and Sustainable Development, 8 (7), 59–68.
[19] Studenmund, A. H. and Johnson, B. K. (2017). Using econometrics: A practical guide (seventh edition). Boston: Pearson.
[20] Bassey, G. E. and Essien, E. B. (2014). Inflation targeting framework for monetary policy in Nigeria: Issues, problems and prospects. Journal of Economics and Sustainable Development (JESD), 5 (8), 88–101.
Cite This Article
  • APA Style

    Christopher Nyong Ekong, Ubong Edem Effiong. (2020). Monetary Policy and Inflation Targeting in Nigeria: The Need for Monetary-Fiscal Coordination. American Journal of Theoretical and Applied Business, 6(3), 37-46. https://doi.org/10.11648/j.ajtab.20200603.14

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    ACS Style

    Christopher Nyong Ekong; Ubong Edem Effiong. Monetary Policy and Inflation Targeting in Nigeria: The Need for Monetary-Fiscal Coordination. Am. J. Theor. Appl. Bus. 2020, 6(3), 37-46. doi: 10.11648/j.ajtab.20200603.14

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    AMA Style

    Christopher Nyong Ekong, Ubong Edem Effiong. Monetary Policy and Inflation Targeting in Nigeria: The Need for Monetary-Fiscal Coordination. Am J Theor Appl Bus. 2020;6(3):37-46. doi: 10.11648/j.ajtab.20200603.14

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  • @article{10.11648/j.ajtab.20200603.14,
      author = {Christopher Nyong Ekong and Ubong Edem Effiong},
      title = {Monetary Policy and Inflation Targeting in Nigeria: The Need for Monetary-Fiscal Coordination},
      journal = {American Journal of Theoretical and Applied Business},
      volume = {6},
      number = {3},
      pages = {37-46},
      doi = {10.11648/j.ajtab.20200603.14},
      url = {https://doi.org/10.11648/j.ajtab.20200603.14},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ajtab.20200603.14},
      abstract = {This paper examined the effectiveness of a monetary-fiscal coordination in inflation targeting in Nigeria for the period 1985 to 2019. The study got its inspiration from the monetarist assertion that inflation is strictly a monetary phenomenon. Data were obtained from the Central Bank of Nigeria statistical bulletin and the World Bank database on World Development Indicators. The study employed the Augmented Dickey-Fuller unit root test, ARDL bounds test for cointegration, and the Error Correction Mechanism (ECM). The unit root test revealed that the variables were stationary at mixed order of level I(0) and first difference I(1). This mixed order made us to employ the ARDL Bounds test for cointegration and the result indicated that there is a long run relationship. The Error Correction Mechanism revealed that 55.4% of the short run disequilibrium is corrected annually. Meanwhile, the study revealed that both monetary policy channels and fiscal policy significantly influence inflation both in the long run and in the short run. The paper concludes by stating that there is a need for a sound monetary-fiscal coordination in the Nigerian economy if the fight against inflation is to be won hence, inflation should not only be viewed as a monetary phenomenon.},
     year = {2020}
    }
    

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    T1  - Monetary Policy and Inflation Targeting in Nigeria: The Need for Monetary-Fiscal Coordination
    AU  - Christopher Nyong Ekong
    AU  - Ubong Edem Effiong
    Y1  - 2020/10/21
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    N1  - https://doi.org/10.11648/j.ajtab.20200603.14
    DO  - 10.11648/j.ajtab.20200603.14
    T2  - American Journal of Theoretical and Applied Business
    JF  - American Journal of Theoretical and Applied Business
    JO  - American Journal of Theoretical and Applied Business
    SP  - 37
    EP  - 46
    PB  - Science Publishing Group
    SN  - 2469-7842
    UR  - https://doi.org/10.11648/j.ajtab.20200603.14
    AB  - This paper examined the effectiveness of a monetary-fiscal coordination in inflation targeting in Nigeria for the period 1985 to 2019. The study got its inspiration from the monetarist assertion that inflation is strictly a monetary phenomenon. Data were obtained from the Central Bank of Nigeria statistical bulletin and the World Bank database on World Development Indicators. The study employed the Augmented Dickey-Fuller unit root test, ARDL bounds test for cointegration, and the Error Correction Mechanism (ECM). The unit root test revealed that the variables were stationary at mixed order of level I(0) and first difference I(1). This mixed order made us to employ the ARDL Bounds test for cointegration and the result indicated that there is a long run relationship. The Error Correction Mechanism revealed that 55.4% of the short run disequilibrium is corrected annually. Meanwhile, the study revealed that both monetary policy channels and fiscal policy significantly influence inflation both in the long run and in the short run. The paper concludes by stating that there is a need for a sound monetary-fiscal coordination in the Nigerian economy if the fight against inflation is to be won hence, inflation should not only be viewed as a monetary phenomenon.
    VL  - 6
    IS  - 3
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Author Information
  • Department of Economics, Faculty of Social Sciences, University of Uyo, Uyo, Nigeria

  • Department of Economics, Faculty of Social Sciences, University of Uyo, Uyo, Nigeria

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