The Effect of Monetary Policy on Inflationary Pressure in Nigeria

Chukwu Grace Fidelis, Ibrahim Umar Zwall

Abstract


This research work entitled “The Effect of Monetary Policy on Inflationary Pressure in Nigeria” investigated the effectiveness of selected monetary policy tools in the control of inflation in Nigeria. Data used were mainly sourced from the World Bank covering the period 1980 to 2017. The study estimated the Augmented Dickey-Fuller (ADF) unit root test, Johansen Cointegration test and the Error Correction Model (ECM). The result of the ADF showed that all the variables are integrated of order I (1), except for the Error Correction Term (ECT) which is stationary of order I (0). The Johansen cointegration test result revealed the presence of a long-run relationship between the inflation rate and the selected monetary policy variables. The ECM result revealed that the estimated model has a self-equilibrating mechanism of 12%. The paper concludes that Treasury Bill Rate (TBR) is an effective tool in controlling inflation both in the short and long run. While Exchange Rate (EXR) and Money Supply (MS) are very effective monetary policy tools in the control of inflation in the short run. The Monetary Policy Rate (MPR) is effective in the long run. Therefore, it is recommended that the monetary authority in Nigeria should regulate EXR and MS in controlling inflation to achieve a short-term result. TBR should be used to control the rate of inflation both in the short and long-run, while MPR should be used to control inflation for a long-term result.


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