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Testing for explosive behavior in relative inflation measures: Implications for monetary policy under uncertainty

Author

Listed:
  • Jamilu Iliyasu

    (Department of Economics, ABU Business School, Ahmadu Bello University, Nigeria)

  • Aliyu R Sanusi

    (Department of Economics, ABU Business School, Ahmadu Bello University, Nigeria)

  • Suleiman O Mamman

    (Graduate School of Economics and Management, Ural Federal University, Russia)

Abstract

This study sets out to examine the explosive behaviour of relative inflation measures and its effects on consumers' inflation expectation as well as on the efficacy of monetary policy under uncertainty. To achieve these objectives, we applied the Generalised Sup Augmented Dickey-Fuller (GSADF) test to Nigeria's data on aggregate consumer price index (CPI) and its energy, food & “core” components over the period 1995-2020. In the case of energy price, food price and aggregate price, four (4), two (2) and two (2) episodes of explosive behaviours were identified relative to core items. Two of these episodes correspond to the 2016 recession and COVID-19 economic lockdown. It was found that under explosive regimes, inflation expectations were significantly affected, and consumers had become increasingly uncertain about the impact of monetary policy on inflation. One implication of these findings is that because the explosive nature of relative inflation is found to be a determinant of inflation expectation, considering the explosiveness of relative inflation may be an important input to monetary policy decisions. Therefore, we recommend that Central Bank of Nigeria should consider explosiveness in relative inflation measures to determine the best instrument for managing inflation.

Suggested Citation

  • Jamilu Iliyasu & Aliyu R Sanusi & Suleiman O Mamman, 2023. "Testing for explosive behavior in relative inflation measures: Implications for monetary policy under uncertainty," Economics Bulletin, AccessEcon, vol. 43(2), pages 934-947.
    • Handle: RePEc:ebl:ecbull:eb-22-00840
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Inflation; Expectations; Uncertainty; COVID-19; Monetary Policy; Central Bank; GSADF;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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