Central Bank’s Balance Sheet and Inflation in Nigeria: Does Asymmetry Matter?

This study examines the asymmetric impact of the CBN balance sheet size and composition on inflation in Nigeria using nonlinear dynamic OLS model for the period January 2009 to December 2023. Results suggest that CBN balance sheet expansion leads to inflation, while balance sheet contraction brings inflation under control. This is true for headline, core and food measures of inflation. The magnitude of a fall in inflation rate associate with a one percent contraction of the balance sheet size is greater than the magnitude of a rise associated with a one percent expansion. Also, asset concentration is associated with a rise in inflation and dispersion with a fall. However, it is asset concentration that has a significant impact on inflation. Not accounting for asymmetry suggests that the rise in inflation associated to a one per cent expansion of the balance sheet is equal to the fall in inflation associated to one percent contraction, which is misleading. Also, the CBN balance sheet size contributes more to inflation compared to composition. However, the treasury bill rate proves to be a useful tool in the hand of the CBN to rein in inflation. The study recommends intensified effort towards recovering the funds extended to beneficiaries of the Bank’s various intervention programmes and in line with the provisions of the law, rescind and end the securitization of advances to the fiscal authority.