INFLATION TARGETING AND MONETARY POLICY INSTRUMENTS: EVIDENCE FROM NIGERIAN AND GHANA Osuji Casmir Chinaemerem Department of Accounting, Banking & Finance Delta State University, Asaba Campus. Delta State Nigeria. & Akujuobi, L.E (Ph.D) Department of Financial Management Technology (FMT) School of Management Technology Federal University of Technology, Owerri (FUTO) PMB 1526 Owerri, Imo State, Nigeria ABSTRACT This paper attempts to examine whether or not one of the preconditions for a successful inflation – targeting framework is present in Nigeria and Ghana. That is, the paper wants to find out whether or not a stable and predictable relationship exists between inflation and monetary policy instruments in these countries. In achieving this objective, vector autoregressive models are built in line with the work of Goltschalk and Moore (2002) and Tutar (2002). Specifically, three VAR models are estimated starting with a two-variable model including money supply and prices, and then, adding some financial variables such as nominal exchange rate and interest rates in order to see their contribution to a VAR system for Nigeria and Ghana. It is observed from the VAR twovariable model that inflation is an inertial phenomenon in Nigeria and Ghana, and money innovations are not strong and statistically important is determining prices when compared will price shocks themselves. When adding financial variables like exchange rates and interest rates to the models, the paper does not observe any significant improvement in the model. In the short run, innovations in prices are mostly explained by their own shocks, the monetary policy instruments, such as interest rates and exchange rates, have little or no effect on prices. Therefore policy linkage between inflation and monetary policy instruments in Nigeria and Ghana is not strong in the short run and thus, these countries are not yet candidates for inflation targeting. Keywords: Inflation Targeting, Monetary Policy, Price shocks.
Overview of the Study Focus on inflation targeting is increasing as a framework for implementing monetary policy in literature. Bernanke et al (1999) defines inflation targeting as: “a framework for monetary policy characterized by the public announcement of official quantitative targets for the inflation rate over one or more time horizons, and by explicit acknowledgment that low, stable inflation is 52
Kuwait Chapter of Arabian Journal of Business and Management Review Vol. 1, No. 11; July 2012 monetary policy’s primary long-run goal”. Among other important features of inflation targeting are vigorous efforts to communicate with the public about the plans and objectives of the monetary authorities, and in many cases, mechanisms that strengthen the central bank’s accountability for attaining those objective From this definition, the authors take some care to describe inflation targeting as a framework and not as a rule. In other words, inflation targeting fits somewhere between the extremes which feature in the rules versus discretion” debate which vaged in monetary policy circles in earlier years. Inflation targeting is not automatic in the sense of a Friedman – like rule by which growth in the money supply is governed in order to achieve the ultimate goal of price stability (Sharwn, 2000). But inflation targeting does not allow the central bank full discretion to take decisions in any ad-hoe or unconstrained fashion. Rather, inflation targeting can be described as a form of “constrained discretion”. (Sharwin, 2000). The quote Bernanke et al (1999), “by imposing a conceptual structure and its inherent discipline on the central bank, but without criminating all flexibility, inflation targeting combines some of the advantages traditionally ascribed to rules with those ascribed to discretion.
The implementation of inflation targeting depends, among other...