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INFLATION DYNAMICS IN NIGERIA: OPEN ECONOMY HYBRID–NEW KEYNESIAN PHILIPS CURVE APPROACH (1986 – 2010
Abstract:
The formal adoption of the inflation targeting policy framework by the CBN requires a good understanding of the inflationary process in Nigeria. Central banks that adopt inflation targeting across the world use some variants of the New Keynesian Policy Model (NKPM) which in turn rely on the correct empirical specification of the New Keynesian Philips Curve (NKPC) because it is microfounded, hence immune to Lucas critique. This study used the Generalized Method of Moments (GMM) statistical techniques to estimate the open-economy NKPC for Nigeria in order to determine if it fits the Nigeria’s data well and identify the empirical price-setting behaviour of the Nigerian firms. It also seeks to assess the relative role of external factors on the inflation dynamics in Nigeria and determine the forecasting potential of the NKPC model for Nigeria’s inflationary process. The estimate shows that the open-economy hybrid NKPC model fit Nigeria’s data very well. It also indicates that, although most firms are backward-looking, a significant proportion of firms in Nigeria are forward-looking, hence the CBN communication could be used to influence their price-setting behaviour and by implication inflation dynamics. The estimate also reveals that exchange rate depreciation and relatively labour market dynamics have significant impact on inflation dynamics in Nigeria. Finally it is observed that the open-economy hybrid NKPC model could be used to set target inflation in Nigeria
INFLATION DYNAMICS IN NIGERIA: OPEN ECONOMY HYBRID–NEW KEYNESIAN PHILIPS CURVE APPROACH (1986 – 2010
