Signal Extraction from the Bond Market and Inflation Forecasting in Nigeria

Abstract

The study seeks to examine the bond market information content and its implications for forecasting inflation in Nigeria and the influence bond market is having in predicting monetary policy outcome. The study is predicated on the premises that are enunciated in the Expectations Theory of Term Structure. The theory suggests that interest rates and prices are driven by expectations. ARIMA model was estimated using monthly data on inflation rate and government bond for the period of 2006-2019. The study finds that: is a significant relationship between Signal Extraction from bond market and inflation forecasting in Nigeria and that inflation is more likely to move upward; the influence of bond market in prediction of monetary policy outcome is not accurate; and the bond market cannot provide useful information for monetary policy and has no significant role to play in the monetary policy. From these findings, the study recommends that before deciding on operational target variables that will affect individual welfare, monetary authorities should first identify the source of current economic shocks in the economy.