Achieving and Maintaining Price Stability in Nigeria

IMF Working Papers, June 1, 2004

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Reviews the historical performance of monetary policy in Nigeria.
Discusses the relative merits of alternative monetary policy strategies that Nigeria could adopt in the future, once the many operational issues that today obstruct the conduct of monetary policy have been addressed.
Concludes that an analysis of external and fiscal dominance in Nigeria reveals that none of the candidate strategies is particularly appealing.
Argues that, on various grounds, a long-run target for inflation combined with a free float seems to be the ultimate option.
Shows how to design and operationalize such a regime in Nigeria when account is taken for the emerging market features of the economy.

Historical evaluation of monetary policy performance in Nigeria.
Assessment of alternative monetary policy strategies under conditions of external and fiscal dominance.
Examination of operational constraints currently obstructing effective monetary policy.
Consideration of emerging market features and their implications for regime design and implementation.

None of the candidate monetary policy strategies is particularly appealing given Nigeria’s exposure to external and fiscal dominance.
A long-run inflation target combined with a free float is identified as the preferred long-run strategy.
Practical guidance is provided on designing and operationalizing an inflation-targeting-with-free-float regime tailored to Nigeria’s emerging market characteristics.

Address the many operational issues that currently obstruct the conduct of monetary policy before transitioning to a chosen strategy.
Prioritize institutional and operational reforms that would enable the Central Bank to implement a long-run inflation target under a free float.
Incorporate the specific features of an emerging market economy into the operational design of the inflation-targeting framework.