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Price Volatility, Expectations and Monetary Policy in Nigeria

Author

Listed:
  • 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.

Suggested Citation

  • Ajimuda Olumide, 2009. "Price Volatility, Expectations and Monetary Policy in Nigeria," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 109-140, May.
    • Handle: RePEc:cbu:jrnlec:y:2009:v:1:p:109-140
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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