INFLATION TARGETING IN AN EMERGING MARKET VAR AND IMPULSE RESPONSE FUNCTION APPROACH

Abstract

This study examines the inflation targeting in developing countries, using Nigeria as a case study. Methodologically, an Auto-Regression (VAR) and impulse response function (IRF) model were used to analysis the nature of the impacts, where consumer price index (CPI) is presumed to depend upon changes in its determinants. The Auto-Regression process including the consumer price index, broad money supply, exchange rate, gross domestic product and government expenditure is estimated over the period 1970-2010. The model ascertained the extent in which policy target of these macroeconomics variables does lead to changes in inflation. The results show that, money supply and past level of inflation have the potentials of causing significant changes in inflation in Nigeria. This study therefore suggests that more policy attention should be given these variables in other to have stable inflation rate in Nigeria.