Does Inflation Expectation Matter for Inflation in Nigeria?
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Abstract
This study examines the role of inflation expectations in shaping Nigeria’s inflation dynamics, recognizing their critical effect on macroeconomic stability. Despite the importance of expectations in actual inflation, empirical evidence on their impact in Nigeria remains limited. Using quarterly data from 2010Q1 to 2024Q1, this paper employs a Vector Autoregressive (VAR) and Structural VAR (SVAR) framework to examine both forward-looking expectations (proxied by Google Trends) and backward-looking expectations (proxied by lagged inflation). The results indicate that forward-looking expectations exert a minimal and statistically insignificant effect on actual inflation, while lagged inflation expectations exhibit strong persistence, explaining approximately 60–65% of the variance in inflation. Exchange rate shocks emerge as the second most significant driver (15–25%), underscoring Nigeria’s vulnerability to currency fluctuations. In contrast, monetary policy rate shocks contribute only 5–8%, reflecting weak policy transmission. Impulse response analysis further shows that forward-looking expectations reduce inflation, whereas backwards-looking expectations amplify it. These findings highlight that inflation in Nigeria is predominantly shaped by adaptive, backward-looking behavior rather than forward-looking expectations. The paper recommends strengthening exchange rate stability, enhancing the credibility and communication of monetary policy, and promoting a gradual shift toward forward-looking expectations to improve inflation management and anchor price stability.
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