Pages: (1-16 )
Abstract
One of the channels of transmission of monetary policy through which action is transmitted to target variables is the inflation expectation channel. However, the efficacy of this channel has been undermined by the low credibility of Central Banks. As a result, people’s expectations is guided by pessimism rather than Central Banks target. To circumvent this challenge, this study examines the inflation expectation channel in monetary policy transmission and its effect on real sector output in Nigeria over a period of 1990 to 2023. The study uses the Autoregressive Distributed Lag (ARDL) model to analyse the secondary data collected from Central Bank of Nigeria Statistical Bulletin (2024). The results indicate that inflation expectations exert a negative, albeit statistically insignificant, influence on real sector output over the long term. In the short term, inflation expectations have negative impact on real sector output in Nigeria over the period of the study. The error correction process verifies the presence of a stable long-term equilibrium among the variables. This finding implies that it corroborates the expectations-augmented Phillips Curve theory, highlighting the significance of expectations in influencing output. Based on the findings, the study recommends for more robust inflation-targeting frameworks alongside supportive fiscal and trade policies to improve policy efficacy and stimulate real sector growth.
Keywords: Inflation Expectation, Real Sector Output, Nigeria, ARDL,