Estimation of Sacrifice Ratio for the Nigerian Economy using a Time Varying ADRL Approach

Alternative Title

Estimation of Sacrifice Ratio for the Nigerian Economy using a Time Varying Autoregressive Distributed Lag Approach

Authors

E. T. Adamgbe, Central Bank of NigeriaFollow
M. O. Abeng, Central Bank of NigeriaFollow
A. A. Omosola, Central Bank of NigeriaFollow

Publisher

Central Bank of Nigeria

Keywords

Sacrifice Ratio, Output Loss, Inflation, Time-varying ARDL, Gibbs Sampling, Nigeria

Abstract

Monetary policy in the last few decades had focused on creating the enabling conditions for sustainable economic growth, using the level of inflation as the pivotal tool, complemented with central banks’ independence and monetary policy transparency. However, attaining the delicate balance of achieving low inflation and optimal output, with minimal tradeoffs has been a cause for concern for policy makers. Thus, the measurement of the output loss, arising from the inflation-output tradeoff, forms the fulcrum of this study. This study estimates the sacrifice ratio using a state space methodology in an aggregate supply framework to adjust for real business cycle rigidities. The results from the ARDL model analysis suggest that when average inflation was lower, the sacrifice ratio was higher. On the balance of risks, an average sacrifice ratio of 0.69 shows that the achievement of price stability will come at a cost of a high output tradeoff. In that case, the monetary authority will be relatively more aggressive with its policy mix, especially adjusting interest rate, to achieve a radical influence on non-structural factors that drive inflation.

Author Bio

Adamgbe, E. T. and Abeng, M. O. are staff of Governor’s Department while Omosola, A. A. is a staff of Research Department, Central Bank of Nigeria.

Publication Title

CBN Economic and Financial Review

Issue

3

Volume

57

Recommended Citation

Adamgbe, E. T.; Magnus, M. O.; Omosola, A. A. (2019). Estimation of Sacrifice Ratio for the Nigerian Economy using a Time Varying ARDL (Autoregressive Distributed Lag) Approach. CBN Economic and Financial Review . 57(3), 1-16.