Food price and Inflation Adjustments in Nigeria: Evidence from Threshold Cointegration

Abstract

This paper investigates two stages of transmission through which inflation stabilization policy affects headline inflation by estimating a threshold cointegration model. The paper finds that asymmetric monetary shocks passing-through food prices exerts inflationary pressure on consumer prices, and is characterized by deep asymmetric movement, large degree of stickiness in adjusting downward, while exhibiting upward momentum in correcting food price fall. In addition, asymmetries were found in consumer price adjustment as food price shock transmits substantial inflationary pressure to consumer prices, while disinflationary effect originating from a fall in food price is inconsequential. The coefficients of adjustment were found to be robust in the sub-sample. This paper concludes that an unconventional monetary policy intervention that aims at stabilizing headline inflation by means of stimulating food supply could unavoidably inflate food prices more than it could deflate it especially if the elasticity of domestic food output to money supply growth is less compared to response of food price to money supply. Hence, caution must be taken on the size differential of output response to the net rise in money supply and price adjustment to the expansion in money supply.