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Responsiveness of Headline Inflation to the Dynamics of Monetary Aggregates in Nigeria: A Structural Vector Autoregressive (SVAR) Approach

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  • Johnbosco Chukwuma Ozigbu

    (Rivers State University, Port Harcourt – Nigeria)

Abstract

This paper contributes to the literature on the monetary transmission mechanism by using monthly data (January 2001 to December 2022) from the Central Bank of Nigeria (CBN) Statistical Bulletin to investigate how headline inflation responds to changes in monetary aggregates in Nigeria. The structural vector auto regression (SVAR) method by which the impulse response functions (IRF) and variance decomposition were used to examine the response of inflation to changes in narrow money (M1), M2, M3, and the interbank call rate In deviation from economic theory, the study found that positive shocks to M1 and M2 caused inflation to decline insignificantly. Positive shocks to M3 had an insignificant positive impact on inflation both in the short- and long run. This finding highlights that shocks to M3 are not a significant source of inflation pressure, and its control may not be a useful tool for the CBN to tame inflation in Nigeria. The study found that inflation declined insignificantly in response to positive shocks to the interbank call rate. This finding suggests that hiking interest rates have not been effective in addressing the problem of inflation in Nigeria. Overall, the results showed that using M1, M2, and M3 and interbank call rates is less potent in controlling inflation in Nigeria. Hence, this paper recommends reducing the number of financially excluded Nigerians by encouraging banking habits among Nigerians, especially those in un served and underserved rural areas.

Suggested Citation

  • Johnbosco Chukwuma Ozigbu, 2023. "Responsiveness of Headline Inflation to the Dynamics of Monetary Aggregates in Nigeria: A Structural Vector Autoregressive (SVAR) Approach," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(9), pages 1701-1711, September.
    • Handle: RePEc:bcp:journl:v:7:y:2023:i:9:p:1701-1711
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    References listed on IDEAS

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