Ajimuda Olumide (Department of Economics and Statistics,University of Benin, Nigeria)
Abstract
The study has as its objectives, to determine the influence of price volatility and price expectation in the rate of inflation as a measure of the price level. In addition, the study sought to evaluate ipso facto the extent to which monetary policy has influenced inflation by reducing price volatility and expectation towards zero. The study applied the maximum likelihood estimator in addition to the GARCH (p, q model) to estimate the steady state model of inflation. As a measure of volatility, the conditional standard deviation for inflation was obtained from the GARCH model. Inflation expectation was solved using the Gauss-Siedel algorithm for forward-looking expectations with actual inflation series as start values. The VAR model was estimated to determine the impulse response functions and the variance decomposition using Cholesky decomposition so as to determine the response to monetary policy of inflation, its volatility and expectations. The study found that inflation expectation and price volatility not only influence the contemporaneous inflation, it also results in persistence in interest rate differential and monetary growth, thus compromising the objective of monetary policy. The study recommends that explicit anchoring of expectations and volatility ensure that monetary policy is forward-looking and that a symmetric inflation target strengthens intertemporal sustainability in monetary policy management. In addition, the behaviour of inflation ex post and the speed of convergence of inflation expectations should provide the basis for determining the most appropriate pulse of nominal interest rate in the economy which will keep inflation trajectory consistent with the growth of the economy.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Constantin Brancusi University, Faculty of Economics in its series Working Papers with number
8.
Length: 32 pages Date of creation: May 2009 Date of revision: Publication status: Published in Annals of the Constantin Brancusi University of Targu Jiu, Economics Series, Issue 1/2009, May 2009, pages 109-140 Handle: RePEc:cbu:wpaper:8
Did you know? You can import bibliographic info in various formats into you bibliographic tool, or just into your word processor. See under "publisher info" on each abstract page.