Title: Inflation and the Structure of Aggregate Output: Theoretical, Empirical and Policy Issues
Author: Abraham E. Nwankwo
Publisher: Adonis and Abbey Publishers Ltd, London, U.K
Reviewer: Mike I. Obadan, Professor of Economics, University of Benin and Chairman, Foundation for Education and Development, Benin City
Review presentation: At the public presentation/launching of the book (by Dr. Abraham Nwankwo) in Abuja on Thursday, 29th June, 2017.
Dr. Abraham Nwankwo’s latest book, Inflation and the Structure of Aggregate Output: Theoretical, Empirical and Policy Issues, is a notable addition to the literature on the relationship between inflation and output for two reasons. First, is the ‘structure of the economy’ approach used in analysing the relationship between inflation and output in Nigeria and the very lucid style of writing which would make the book very appealing, even to the general reader. Secondly, the issue of inflation and output that is primarily addressed in the book is of particular significance now in Nigeria whose economy is beleaguered by the non-classical type of recession, in the sense that it is characterised by stagflation – a situation in which declining output and rising unemployment coexist with high rate of inflation. The analysis in the book points to significant value added.
The sub-title of the book suggests the nature of the content and type of analysis. In this direction, the book provides deep insights from theoretical review of inflation dynamics in relation to output, empirical review, and, importantly, empirical analysis of the relationship between inflation, on the one hand, and aggregate output and its components, on the other, in Nigeria as a case study. The book also provides illuminating policy insights from the review of comparative experiences of central banking and monetary policy of some industrialised countries – United Kingdom, United States, Japan, the European Union countries, and two developing countries – China and India.
The book is divided into 15 chapters under two broad themes or parts. Part One contains the empirical investigation of the relationship between inflation and output in Nigeria. This part has six chapters with the first two providing background information and context for the empirical study. Leaning on the perspective that a lot of inflationary impulses are embedded in the structure of the Nigerian economy, the author examines the following characteristics of the Nigerian economy that are related to inflation:
- Weak performance of the agricultural sector/lagging agricultural sector;
- High population growth rates;
- Increasing income in non-agricultural sector;
- High rate of monetary expansion;
- Government funding of fiscal deficits through the Central Bank of Nigeria;
- Bludgeoned public expenditure, especially defence and general administration; and
- Foreign trade through increased oil exports and increased imports, i.e, imported inflation.
The heart of the book is chapters 3 – 6 which focused on theoretical and empirical analysis of output-inflation relationship in Nigeria. It is here that the author makes an original contribution to knowledge and practice as the findings reflect original research of high policy relevance. The approach reflects a new thinking on the relationship between aggregate output and inflation. It is a ‘structure-of-the-economy approach’ which entails examining how different components of output (GDP) relate to the general price level. This contrasts with the erstwhile approach in empirical studies which focused on the relationship between aggregate output and inflation. This approach, as the author correctly points out, tended to obscure a lot of the underlying influences which are necessary for the understanding of the structure and dynamics of inflation. The structure-of the-economy approach adopted recognised the fact that different sectors, for example, agriculture, manufacturing, oil and gas, wholesale and retail trade, may exert differential impact – positive or negative – on inflation. Thus, the empirical study undertaken in the book sought to find out how different sectors of the economy impact inflation and how the interaction between the agricultural and non-agricultural sectors affect the general price level.
The empirical findings reported are very revealing and tend to confirm the basic hypothesis that the components of aggregate output have differential impacts on inflation – with some components accentuating inflation rather than dampening it. Thus:
- The sectors that tend to accentuate inflation include: non-agricultural output, petroleum exports, non-agricultural – agricultural output ratio. Besides, money supply and imported inflation are important factors contributing to inflation in the country.
- Some sectors, on the other hand, dampen or reduce inflation, i.e, they have an inverse relationship with inflation. They include aggregate output, agricultural output, manufacturing output, construction output, and wholesale-and-retail trade. Increases in these reduce the price level.
Thus, the message from the empirical study is that as the components of aggregate output affect the price level differently – some positively, others inversely – it may not be appropriate to use aggregate output in empirical studies of output-inflation relationship. Rather, both aggregate and components can be used. Importantly, in the design and execution of anti-inflation policy, all of monetary, fiscal and structural characteristics of the economy should be taken into account.
Chapter 7 which discusses Monetary Policy Essentials and Frameworks is very insightful, especially for students of monetary economics, and people who do not have a strong background in economics. It provides lucid explanation of monetary policy frameworks that we often hear or read about, for example, monetary targeting, inflation targeting, and exchange rate targeting. Also of note is the discussion of the phenomenon of “impossible trinity” relating to the impossibility of an economy having a policy of free movement of international capital (capital mobility), fixed exchange rate, and independent monetary policy at the same time. For any two of the three policies to be operational or effective, the third must be sacrificed.
The remaining core chapters, 8 – 14, contain surveys of the central banking and monetary policy experiences of four industrialised countries and three developing countries (including Nigeria) mentioned earlier. These case studies provide rich insights into the experiences of these countries, especially in relation to their institutional frameworks for monetary policy, policy objectives, monetary policy frameworks and instruments, among others. One message that comes out of the surveys is that the pre-eminent mandate of the central banks / primary objective of monetary policy is price stability while not losing sight of the objectives of sustained economic growth and higher employment. In other words, price stability (low inflation) is seen as a most important condition for economic growth. In all the developed countries covered, price stability is defined as a rate of inflation maintained below but close to 2.0 per cent over the medium term. In India, the inflation target is 4.0 per cent with symmetric upper and lower limits of below and above 2.0 per cent. The desire for price stability derives from the fact that a higher rate of inflation would reduce the public’s ability to make accurate longer-term economic and financial decisions, while a lower inflation rate would be associated with heightened risk of falling into deflation. Deflation has never been an issue in Nigeria. Rather, it is very high rate of inflation which currently stands at over 17.0 per cent. Policy makers could therefore benefit from the findings of the empirical study in this book in their efforts to tackle inflation in the country.
Finally, the book draws attention to what it describes as issues of concern relating to the Central Bank of Nigeria’s special development interventions, undertaken in the context of the CBN Act. The author observes that the CBN has been proactive in financing various sectors of the economy and many of the interventions seem to be more or less direct rather than intermediated. The book lists issues of concern regarding the CBN’s financing of real sector as follows:
- Intrusion into the fiscal operation space;
- Weakening of focus on core mandate of monetary policy;
- Creating a conducive atmosphere for conflict of interest and compromise of standards and principles;
- The nature of intervention inevitably brings the CBN dangerously close to politicians who must be involved in the “officially” sponsored real sector projects, thereby breaking the thin barrier protecting the Central Bank from predation of the politicians.
Thus, in the book, the author is concerned about the possible impact of the interventions on CBN’s independence. No doubt, the CBN may have acted in consideration of the need for overall economic stability in the country. However, if stakeholders continue to express concerns about the interventions, the Bank may need to determine its degree of involvement that will not compromise its independence.
On this note, Mr. Chairman, author of the book, distinguished ladies and gentlemen, I wish to end this review by commending Dr. Nwankwo for writing the policy-oriented book. It is a document which provides tremendous insights relating to a contemporary problem plaguing the Nigerian economy, namely inflation. The book is well-written in a lucid style. Different categories of readers can easily relate with it. I therefore, commend it to policy makers, researchers, tertiary education teachers, undergraduate and graduate students of monetary economics, private sector operators, and the general reader. They will find one aspect or the other of the book highly educative or useful.