Is Nigeria Ready for Inflation Targeting?

This paper evaluates whether Nigeria is ready to adopt inflation targeting (IT), a monetary policy framework that several emerging markets have adopted over the last one decade. The paper reviewed literature on selected conditions for successful implementation of IT and then focused on whether one specific precondition of an empirically stable monetary transmission mechanism is tenable. Vector autoregressive (VAR) model was applied using select monetary policy and other macroeconomic variables to explore the various channels using the Granger causality tests, impulse responses, and variance decompositions. Results showed that inflation in Nigeria is impassive to monetary transmission variables in the model. Specifically, weak link between prices and credit and interest rate channels were established. However, evidence of strong inverse link between exchange rate and prices was found in the model. This suggests exchange rate pass-through on the level of prices in the economy. The paper, therefore, recommends the pursuance of IT lite in Nigeria.