Price Volatility, Expectations and Monetary Policy in Nigeria

Ajimuda Olumide

11 citations0/0 files storedRePEc: Research Papers in Economics

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Monetary Policy and Economic Impact Market Dynamics and Volatility Economic theories and models

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.

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References

1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1991Conditional Heteroskedasticity in Asset Returns: A New Approach 1998Monetary policy rules in practice 1999Monetary Policy Rules 1999Nominal income targeting in an open-economy optimizing model 1986Measuring and Analyzing the Effects of Short-Term Volatility in Real Exchange Rates 2020Taylor’s Rule and the Fed 1999Cointegration, causality, and forecasting : a festschrift in honour of Clive W.J. Granger

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