Central Bank Independence and Inflation in Nigeria

Abstract

In this study, the nexus between Central Bank Independence (CBI) and inflation is examined for the Nigerian economy. Utilising data spanning 1980- 2012, due to data availability, and the Garriga CBI database developed from the Cukierman index, in a Dynamic Ordinary Least Squares and the Error Correction Mechanism, CBI was found to have a significantly negative impact on inflation in both long run and short run dynamic models respectively. Also, for robustness, the components of CBI such as personnel independence, political independence and financial independence were all significantly negative determinants of inflation in Nigeria in the long run. The long-run results further confirmed an inverse nexus between real per capita GDP, political freedom and inflation in Nigeria suggesting that pro-per capita income growth policies are necessarily not inflationary and that institutional quality reduces inflation in Nigeria. CBN reforms and financial depth were found to directly impact inflation in Nigeria. Since the enhancement of CBI dampens inflation in Nigeria, the laws establishing the CBN need to be reevaluated and strengthened to allow for its true independence so that it can perform its main objective of price stability.