Why is the CBN struggling to manage inflation?
Controlling inflation. Source: Stears

Election season is typically a time for presidential aspirants to prove their suitability for office to the electorate.

This time is no different. Just last week, one of the aspiring candidates communicated one of his proposed policies for Nigeria if elected—through a Twitter thread.

In one of the tweets, he remarked, "we will not use wage and price controls to fight inflation. Rather, we will pursue a contractionary monetary policy. We will mop up excess liquidity by reducing the money supply within an economy."

We will come back to this proposed contractionary policy but first, a look at why economists might have been puzzled by this announcement.

 

Key takeaways:

  1. Monetary policy is only as strong as the mechanism that follows it. That is, without the reaction of the real economy to monetary policy, it would fail to achieve the goal for which it was set in the first place. 

  2. However, the real sector only reacts based on their ability to anticipate the actions of the monetary authority and their trust in the institution. Monetary authorities like the US Fed and the ECB have effectively pulled their economies out of dire economic situations due to the bank's credibility to achieve its set goals. 

  3. The job of Nigeria's next Central Bank governor is to earn the trust of Nigerians in the institution by restoring the confidence of Nigerians by restoring the credibility of the bank that when it sets out to achieve a goal, it'll do whatever it takes to achieve that goal.

 

First, it's important to note that except this candidate plans to run for the office of the governor of the Central Bank of Nigeria (CBN), the president has no business meddling in monetary policy. Sure, he can advise the CBN governor or—more appropriately—suggest what policies he'd like to see the bank implement. But that's where his jurisdiction stops; he cannot implement policies on behalf of the central bank.

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Gbemisola Alonge

Gbemisola Alonge

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