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Is the Phillips curve useful for monetary policy in Nigeria?

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Abstract

The objective of this article is to determine if the Phillips curve is a relevant tool to conduct monetary policy in African countries wishing to adopt an inflation-targeting regime. I choose Nigeria as a case of study because it is in the early stage of the implementation of this regime. I estimate a medium-sized model for monetary policy analysis. The model reflects a synthesis between the New Keynesian and the Real Business Cycle (RBC) approaches. Then I estimate the model by using Bayesian econometric technique in order to overcome the shortage of data availability. The study concludes that there is evidence that central banks can control the inflation rate through a Phillips curve, a Taylor rule that includes the exchange rate, and the sterilization of the resources from oil exports. Nevertheless, there are limits to the stabilization program. The same evidence suggests that it is important to implement a credible inflation-targeting regime to reduce inflation gradually, instead of abrupt stabilization attempts with high costs in lost output.

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Bibliographic Info

Paper provided by Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines in its series ILADES-Georgetown University Working Papers with number inv250.

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Length: 37 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:ila:ilades:inv250

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Keywords: Monetary policy; Phillips curve; inflation-target regime.;

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