Does CBN Intervention Funds Contribute to Inflationary Pressure in Nigeria? An Empirical Investigation

Abstract

The objective of this paper is to empirically evaluate the effects of the Central Bank of Nigeria’s (CBN) intervention on inflation in Nigeria from 2007M12 to 2020M8. The paper employed three-variable Vector Error Correction Model (VECM), with headline inflation examined as an endogenous function of the CBN’s intervention funds and exchange rate movements. The study finds that the CBN’s interventions through credit-easing to specific industries reduce inflation in the long term, particularly food inflation. The outcome suggests that there is divergence in the outcome of unconventional monetary policy in developed and developing countries. It also established that there is a three-month policy lag window in CBN’s response to inflation using intervention funds. This is in consistent with the claim that central banks of developing countries are more flexible in approach and rely more frequently on ‘unconventional’ monetary policy tools with proof that these tools have been successful in a stagflation economy. Nonetheless, the country still faces high supply side inflation rates, which only shows that these tools should be improved upon to increase efficiency and impact.