The Political Economy of Central Banking Independence and Monetary Policy Credibility in Nigeria: A Theoretical and Empirical Analysis

Central bank independence is theorised to enhance monetary policy credibility and inflation control, but the political economy constraints on effective independence in Nigeria, where fiscal dominance and executive influence have historically shaped monetary outcomes, require original theoretical and empirical treatment. This study develops a political economy model of central bank independence in Nigeria that incorporates institutional constraints, political budget cycle effects, and fiscal dominance mechanisms as endogenous moderators of independence-credibility relationships. The theoretical model formalises the conditions under which de jure central bank independence diverges from de facto policy autonomy in a petro-state with dominant fiscal authority. An original De Facto Central Bank Independence Index for Nigeria is constructed using text analysis of Central Bank of Nigeria policy communications, interest rate deviation from Taylor rule predictions, and foreign exchange intervention frequency measures. Empirical testing employs structural vector autoregression with sign restrictions and a time-varying parameter approach to identify regime shifts in independence and credibility across 1993 to 2022. Results confirm that periods of higher de facto independence (1993 to 1998 and 2004 to 2014) were associated with significantly lower inflation persistence (autocorrelation coefficient declining from 0.79 to 0.51). Political budget cycle effects on monetary policy were confirmed, with pre-election monetary policy easing occurring in 7 of 8 electoral cycles studied. The study makes original contributions to political economy of central banking theory adapted for sub-Saharan African institutional contexts and provides the first empirical de facto independence index for Nigeria.

Keywords: central bank independence, monetary policy credibility, political economy, fiscal dominance, Nigeria