Monetary Policy, Price Stability and Economic Growth in Nigeria

Topics: Inflation, Monetary policy, Central bank Pages: 46 (15988 words) Published: December 28, 2010
WP/04/97

Achieving and Maintaining Price Stability in Nigeria
Nicoletta Batini

© 2004 International Monetary Fund

WP/04/97

IMF Working Paper Research Department Achieving and Maintaining Price Stability in Nigeria Prepared by Nicoletta Batini1 Authorized for distribution by James Morsink June 2004 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

This paper reviews the historical performance of monetary policy in Nigeria and discusses the relative merits of alternative monetary policy strategies that Nigeria could adopt in the future, once the many operational issues that today obstruct the conduct of monetary policy have been addressed. An analysis of external and fiscal dominance in Nigeria reveals that none of the candidate strategies is particularly appealing although, on various grounds, a long-run target for inflation combined with a free float seems to be the ultimate option. The paper shows how to design and operationalize such a regime in Nigeria when account is taken for the emerging market features of the economy. JEL Classification Numbers: O23, O24, O55 Keywords: inflation targeting, dollarization, fiscal dominance, Nigeria Author’s E-Mail Address: nbatini@imf.org

1

I would like to thank Bill Allen, Menachem Katz, Jeanne Helen Gobat, Edward Nelson, Steve Nickell, and Geoffrey Wood, and participants at the 2nd Annual Conference on Financial Stability of the Money Market Association of Nigeria, held in Abuja, Nigeria, on May 1–15, 2003, for useful comments on an earlier draft. I am grateful to Stuart Lee and Imran Contractor for excellent research assistance. All errors and omissions are mine.

-2-

Contents

Page

I. Introduction ............................................................................................................................4 II. A Brief History of Inflation in Nigeria: 1980–2003 .............................................................4 A. Recent Inflation Performance in Nigeria ..................................................................4 B. Viable Monetary Policy Strategies for Nigeria .........................................................7 III. Stylized Facts on Nigeria’s External Dominance and Monetary Transmission ..................9 A. Volatility of Selected Variables ................................................................................9 B. Openness .................................................................................................................12 C. Exchange Rate Pass-Through..................................................................................13 D. Commodity-Price Sensitivity..................................................................................15 E. Fiscal Sustainability and Risk Premia on Sovereign Debt ......................................16 IV. A Way Ahead for Monetary Policy in Nigeria? ................................................................18 V. Opting for Price Stability in Nigeria ...................................................................................22 A. Which Stable Prices/Free Float Regime for Nigeria?.............................................22 B. A Target for Stable Prices in Nigeria ......................................................................24 VI. Operationalizing Price Stability in Nigeria via a Simple Plan ..........................................26 A. How Should Taylor Rules be Used in Emerging Market Economies?...................28 VII. The Historical Taylor-Rule-Implied Path for Nigeria......................................................30 A. Taylor Rules for Nigeria...

References: Akerlof, George, William T. Dickens, and George L. Perry, 1996, “The Macroeconomics of Low Inflation,” Brookings Papers on Economic Activity, Vol. 1, pp. 1–59. Aron, Janine, and John Muellbauer, 2002, “Estimating Monetary Policy Rules for South Africa,” in Monetary Policy: Rules and Transmission Mechanisms, ed. by Norman Loayza and Klaus Schmidt-Hebbel, Series on Central Banking, Analysis and Economic Policies (Santiago, Chile: Central Bank of Chile). Ball, Lawrence, 1999, “Policy Rules for Open Economies,” in Monetary Policy Rules, ed. by John B. Taylor (Chicago, Illinois: University of Chicago Press). Batini, Nicoletta, Richard Harrison, and Stephen P. Millard, 2003, “Monetary Policy Rules for an Open Economy,” Journal of Economic Dynamics and Control, Vol. 27 (September), pp. 2059–94. Batini, Nicoletta, and Jeanne Helen Gobat, 2004, “The Transition to a New Monetary Regime in Nigeria: Challenges and Goals,” paper to be presented at the 3rd Annual Conference on Rebuilding the Nigerian Financial System, organized by the Money Market Association of Nigeria, Abuja, Nigeria, May 13–15. Batini, Nicoletta, and Anthony Yates, 2003, “Hybrid Inflation and Price-Level Targeting,” Journal of Money, Credit and Banking, Vol. 35 (June), pp. 283–300. Blejer, Mario I., Alain Ize, Alfredo Mario Leone, and Sérgio R. da C. Werlang (eds.), 1999, “Inflation Targeting in Practice: Strategic and Operational Issues and Application to Emerging Market Economies,” Proceedings from an IMF seminar held in Rio de Janeiro, Brazil, May 3–5. Brook, Anne Marie, Őzer Karagedikli, and Dean Scrimgeour, 2002, “Assessing Alternative Inflation Targets: Growth Effects and Other Costs and Benefits,” in Policy Targets Agreement: Reserve Bank Briefing Note and Related Papers (Wellington, New Zealand: Reserve Bank of New Zealand). Bruno, Michael, and William Easterly, 1995, “Inflation and Long-Run Growth,” NBER Working Paper No. 5209 (Cambridge, Massachusetts: National Bureau of Economic Research). Burdekin, Richard C.K., Arthur Denzau, Manfred W. Keil, T. Sitthiyot, and T. Willet, 2000, “When Does Inflation Hurt Growth? Different Non-Linearities for Different Economies,” GSBGM Working Paper Series 12/96 (Wellington, New Zealand: Victoria University of Wellington Printers).
- 37 Calvo, Guillermo A., and Carmen M. Reinhart, 2000, “Fear of Floating,” NBER Working Paper No. 7993 (Cambridge, Massachusetts: National Bureau of Economic Research). Carneiro, Dionísio Dias, and Duarte, P.G., 2001, “Inércia de Juros e Regras de Taylor: Explorando as Funções de Resposta a Impulso em um Modelo de Equilíbrio Geral com Parâmetros Estilizados Para o Brazil,” Texto Para Discussao No. 450 (Rio de Janeiro: Pontificia Universidade Catolica de Rio de Janeiro, Departamento de Economia). Clarida, Richard, Jordi Galí, and Mark Gertler, 2000, “Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory,” Quarterly Journal of Economics, Vol. 115 (February), pp. 147–80. ———, 2001, “Optimal Monetary Policy in Closed Versus Open Economies: An Integrated Approach,” NBER Working Paper No. 8604 (Cambridge, Massachusetts: National Bureau of Economic Research). Debelle, Guy, and Stanley Fischer, 1994, “How Independent Should a Central Bank Be?” in Goals, Guidelines, and Constraints Facing Monetary Policymakers: Proceedings of a Conference held at North Falmouth, Massachusetts, June 1994, Fuhrer, J. C., Conference Series No. 38 (Boston, Massachusetts: Federal Reserve Bank of Boston). Eichengreen, Barry J., 2002, “When to Dollarize,” Journal of Money, Credit and Banking, Vol. 34 (February). Favero, Carlo, and Francesco Giavazzi, 2003, “Targeting Inflation when Debt and Risk Premia Are High: Lessons from Brazil” (unpublished; Milano, Italy: Università Luigi Bocconi). Feldstein, Martin, 1997, “The Costs and Benefits of Going from Low Inflation to Price Stability,” in Reducing Inflation: Motivation and Strategy, ed. by Christina D. Romer and David H. Romer (Chicago, Illinois: University of Chicago Press). Fischer, Stanley, 2001, “Exchange Rate Regimes: Is the Bipolar View Correct?” in Finance and Development, Vol. 38 (June). Greenspan, Alan, 1996, “Opening Remarks,” in Achieving Price Stability, a Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 29–31. Groshen, Erica L., and Mark E. Schweitzer, 1999, “Identifying Inflation’s Grease and Sand Effects in the Labor Market,” in Martin S. Feldstein, ed., The Costs and Benefits of Price Stability (Chicago, Illinois: University of Chicago Press).
- 38 International Monetary Fund, 2003, “Nigeria: 2002 Article IV Consultation—Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion,” IMF Country Report 03/3 (Washington). Katz, Menachem, 2003, “Nigeria: The Role of Fiscal Policies in Fostering Macroeconomic and Financial Stability,” paper presented at the 2nd Annual Conference on Financial Stability of the Money Market Association of Nigeria, held in Abuja, Nigeria, May 1–15. Khan, Mohsin S., 2003, “Current Issues in the Design and Conduct of Monetary Policy,” IMF Working Paper 03/56 (Washington: International Monetary Fund). Kumhof, Michael, 2000, “Inflation Targeting Under Imperfect Credibility” (unpublished; Stanford, California: Stanford University, Department of Economics). Masson, Paul, and Catherine Pattillo, 2001, “Monetary Union in West Africa (ECOWAS),” IMF Occasional Paper No. 204 (Washington: International Monetary Fund). Masson, Paul R., Miguel A. Savastano, and Sunil Sharma, 1997, “The Scope for Inflation Targeting in Developing Countries,” IMF Working Paper 97/130 (Washington: International Monetary Fund). McPherson, Charles P., 2002, “Petroleum Revenue Management in Developing Countries” (unpublished; Washington: World Bank). Mishkin, Frederic S., 1991, “Asymmetric Information and Financial Crises: A Historical Perspective,” in Financial Markets and Financial Crises, ed. by R. Glenn Hubbard (Chicago, Illinois: University of Chicago Press). ———, 1997, “The Causes and Propagation of Financial Instability: Lessons for Policymakers,” paper presented at Maintaining Financial Stability in a Global Economy, a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 28–30. ———, 2000, “Inflation Targeting in Emerging Market Countries,” NBER Working Paper No. 7618 (Cambridge, Massachusetts: National Bureau of Economic Research). ———, and Klaus Schmidt-Hebbel, 2001, “One Decade of Inflation Targeting in the World: What do we Know and What do we Need to Know?” NBER Working Paper No. 8397 (Cambridge, Massachusetts: National Bureau of Economic Research). Morandé, Felipe G., 2000, “A Decade of Inflation Targeting in Chile: Main Developments and Lessons,” in Monetary Policy and Inflation Targeting in Emerging Economies: Proceedings of a Conference held in Jakarta, July 2000, ed. by Charles Joseph and Anton H. Gunawan (Jakarta: Bank Indonesia).
- 39 Ojo, M.O., 1999, “The Role of the Autonomy of the Central Bank of Nigeria (CBN) in Promoting Macroeconomic Stability,” CBN Economic & Financial Review, Vol. 38 (1), pp. 1–18. Orphanides, Athanasios, 2001, “Monetary Policy Rules, Macroeconomic Stability and Inflation: A View from the Trenches,” Board of Governors of the Federal Reserve System, FEDS Working Paper No. 2001-62 (Washington: Board of Governors of the Federal Reserve System). Poole, William, 1970, “Optimal Choice of Monetary Policy Instrument in a Simple Stochastic Macro Model,” Quarterly Journal of Economics (May), pp. 197–216. ———, 1999, “Is Inflation Too Low?” Federal Reserve Bank of St. Louis Review, Vol. 81 (July, August), pp. 3–10. Schaechter, Andrea, Mark R. Stone, and Mark Zelmer, 2000, “Adopting Inflation Targeting: Practical Issues for Emerging Market Countries,” IMF Occasional Paper No. 202 (Washington: International Monetary Fund). Sims, Christopher A., 2003, “Limits to Inflation Targeting” (unpublished; Princeton, New Jersey: Princeton University). Škreb, Marko, 1998, “A Note on Inflation,” in Moderate Inflation: The Experience of Transition Economies, ed. by Carlo Cottarelli and György Szapáry (Washington: International Monetary Fund and Budapest: National Bank of Hungary). Standard Chartered, 2003, “The Africa Report, Africa Focus and Country Focus: Nigeria” (London: Standard Chartered). Taylor, John B., 1993, “Discretion Versus Policy Rules in Practice,” Carnegie-Rochester Conference Series on Public Policy, Vol. 39 (December), pp. 195–220. ———, 2000a, “Recent Developments in the Use of Monetary Policy Rules,” a presentation at the conference, Inflation Targeting and Monetary Policies in Emerging Economies, at the Central Bank of the Republic of Indonesia, Jakarta, July 13–14. ———, 2000b, “Using Monetary Policy Rules in Emerging Market Economies,” paper presented at Banco de México’s 75th Anniversary Seminar “Stabilization and Monetary Policy: The International Experience,” Mexico City, November 14–15.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Monetary Policy and Economic Growth Essay
  • Monetary Policy
  • Essay on Monetary Economics
  • Essay about Economics and Monetary Policy
  • Essay about Monetary Policy in Nigeria 1980- 2008
  • Effect of Monetary Policy in Nigeria Essay
  • Essay on Role of Monetary Policy in Nigeria
  • The Federal Reserve and Monetary Policy Essay

Become a StudyMode Member

Sign Up - It's Free