Central Bank Independence and Monetary Policy Effectiveness in West Africa: The Case of Nigeria
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Abstract
This study examines the role of central bank independence (CBI) in enhancing the effectiveness of monetary policy in achieving price stability in West Africa, with a focus on Nigeria. The study employs a Markov Switching Regression model (MSRM) to analyze three major political regime shifts in Nigeria (1999, 2007, and 2015) and assesses the interaction between the monetary policy rate (MPR) and CBI, as well as its overall effect on inflation and the exchange rate. The results reveal that CBI significantly enhances the effectiveness of monetary policy, reducing inflation by approximately 73% across all regimes. CBI also improves the stabilizing effect of monetary policy on the exchange rate by at least 63%. Our findings imply that greater central bank autonomy, both in law and practice, will enhance monetary policy effectiveness in Nigeria. Therefore, there is a need for the continuous strengthening of CBI through legal, institutional and operational reform to shield monetary policy from political and fiscal pressures, ensuring long-term price and exchange rate stability.
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