EFFECTS OF MONETARY POLICY ON INFLATION IN NIGERIA

Abstract

This study examined the effects of monetary policy in combating inflation in Nigeria. The main objective of this study was to assess the effect of monetary policy instruments in curbing inflation in Nigeria. The study used annual time series data from 1986-2019 which were sourced from Central Bank of Nigeria Statistical Bulletin. It used inflation rate as the dependent variable while money supply, monetary policy rate, exchange rate and government expenditure were used as the explanatory variables. The study employed Autoregressive Distributed Lag (ARDL) model for its analysis. The findings indicated that interest rate and exchange rate exerted a positive and significant effect on inflation in Nigeria both in the short run and long-run . However, monetary policy rate was not significant in influencing inflation rate in the long-run but was found to be significant in the short-run. It was therefore concluded that while interest rate and exchange rate are potent tools of controlling inflation, monetary policy rate is not very effective in controlling inflationary pressure in Nigeria. Based on these findings, the study recommended that the Central Bank in collaboration with commercial banks should control inflation by keeping the interest rate at reasonable level in order to control inflation.