Effects of Some Monetary Policy Targets on Inflation and Inflation Volatility: Evidence from Nigeria

Abstract

The persistent inflationary pressure despite monetary policy targets has become a phenomenon of interest among researchers. The study investigates the effects of monetary policy targets on inflation and its volatility in Nigeria using data spanning from 1985 to 2019. The ADF unit root test used confirmed that all the variables under study are integrated order zero in their level series. A Comparison of inflation volatility models (ARCH and GARCH models) with appropriate error distribution using AIC indicated that ARCH (1) is most appropriate. The results of least squares (LS) and maximum likelihood (ML) ARCH methods of estimation for the model specifications showed that measures of monetary policy targets such as narrow money supply (M1), broad money supply (M2), net domestic credit(NDC), net credit to government(NCG) and credit to private sector(CPS) have no significant effect on inflation and inflation volatility respectively except M2. However, M2 effect spurs inflation rather than curbing it. Hence, it becomes imperative for the government to make proactive policies targeted to reduce inflationary pressures so as to attain price stability in Nigeria’s economic space.