Institutional Factors and Headline Inflation in Nigeria

This study examined how institutional factors affect headline inflation in Nigeria between 1997 and 2023. The CBN’s monetary autonomy index and regulatory quality were used as institutional factors alongside the monetary policy rate, the broad money supply, and total government expenditure. The datasets for the variables were gathered from the CBN Statistical Bulletin, the National Bureau of Statistics, the World Bank, and the Chinn-Ito index, and analysed using descriptive statistics, pre-estimation tests (unit root and cointegration tests), and the least-squares estimation method. The findings indicate that the CBN's monetary autonomy has a positive effect on headline inflation. Although this finding is not significant at the 5% level, it highlights the CBN's weak institutional position as Nigeria's apex monetary authority, given the prevalence of political interference in its operations. There is evidence that regulatory quality adversely affects headline inflation. This finding suggests that improvements in regulatory quality could reduce inflation in Nigeria. Similarly, the results indicate that the monetary policy rate has a negative and significant effect on headline inflation at the 5% level. As evidenced in the estimated parameter, a percentage increase in the monetary policy rate is associated with a 0.653% decrease in headline inflation. This finding aligns with theoretical expectations, highlighting the effectiveness of monetary policy in mitigating price instability in Nigeria. The results further showed that broad money supply and total government expenditure have a positive effect on headline inflation. Although these findings are not significant at the 5% level, they suggest that expansionary monetary and fiscal policies, as measured by the growth of monetary aggregates and government spending, tend to be inflationary. The error correction coefficient (-0.789) is negative and significant at the 5% level, indicating that distortions from the long-run equilibrium position are corrected at a speed of 78.9% per annum. Given the findings, this study recommends that policymakers should reinforce the CBN's independence in practice and strengthen the bank's inflation-targeting regime by explicitly defining its inflation goals, improving the precision of inflation forecasts, and enhancing the transmission of monetary policy.