Open Market Operations and Inflation in Emerging Markets and Developing Economies: The Nigerian Experience.

Abstract

This study examines the relationship between Open Market Operations (OMO) and inflation in emerging markets and developing economies, specifically focusing on Nigeria. Given the persistent inflationary pressures faced in the country, despite frequent monetary interventions by the Central Bank of Nigeria (CBN), this study adopts a qualitative approach to explore the effectiveness of OMO in achieving price stability. The study investigates how OMO influences liquidity management, short-term interest rates, and inflationary trends in Nigeria by extensively reviewing monetary policy documents, financial reports, and expert analyses between 1990 and 2024. Findings indicate that ECM coefficient (–0.809) confirmed a high speed of adjustment toward long-run equilibrium, suggesting that short-term disequilibria are quickly corrected adding that OMO plays a crucial role in regulating the money supply and controlling inflation, its effectiveness is often hampered by structural economic challenges, fiscal dominance, exchange rate volatility, and weak financial market transmission mechanisms. Additionally, the study highlights the importance of rebasing inflation data to provide more accurate insights into the impact of OMO on price stability. It also underscores the need to complement OMO with broader fiscal policies, financial sector reforms, and enhanced policy transparency to improve its effectiveness. This study recommended a stronger coordination between monetary and fiscal authorities, increased financial market depth, improved inflation measurement techniques, and a more transparent and predictable OMO implementation strategy. These measures will help ensure that OMO remains an effective tool for managing inflation in Nigeria’s evolving economic landscape. The study’s findings underscore that OMO remains a viable but under-optimized tool for inflation management in developing economies. The Nigerian experience suggests that institutional, fiscal, and structural reforms are prerequisites for OMO effectiveness. Emerging markets must move beyond mechanical liquidity operations to strategic, evidence-based, and transparent monetary interventions. Future research should explore the long-term impact of OMO on global economic trends, digital financial innovations, and alternative monetary policy frameworks.