State-Dependent Effects of Oil Price Shocks on Inflation Dynamics: Comparing Monetary and Inflation Targeting Frameworks in Nigeria

This study examines the comparative effects of monetary targeting and inflation targeting frameworks on Nigeria’s inflation dynamics, incorporating the role of crude oil price shocks through a regime-switching analysis. Using monthly data from January 2010 to August 2024, the study employs a Markov Switching Model to capture the behavior of headline inflation under two distinct regimes: Monetary Targeting Framework (MTF) and Inflation Targeting (IT). The results reveal significant differences in inflationary outcomes between the two frameworks. During the MTF regime, crude oil price shocks exhibit a contractionary effect, mitigating inflation but contributing to recessionary tendencies. In contrast, under the IT regime, oil price shocks amplify inflationary pressures, reflecting an economic expansion driven by demand-supply imbalances. Moreover, the IT regime demonstrates superior inflation management, with reduced volatility and a higher probability of persistence. These findings highlight the advantages of the inflation-targeting framework for macroeconomic stability in oil-dependent economies. Policy recommendations advocate for adaptive monetary policies that consider oil price fluctuations to strengthen economic resilience.