CBN Monetary Policy and Inflation Nexus in Nigeria: An empirical approach

Abstract

Purpose: The study explored monetary policy effect on inflation stabilization in Nigeria. Increasing levels of indebtedness may have reduced the fiscal space for fiscal policy intervention and this leaves monetary policy as the real tool of choice for macroeconomic stabilisation. The question we need to ask then is, how effective is this tool of choice?Methodology: Monthly time series data from 2009-2018 were used in estimating the model. The ADF test for the stationarity, the johansen cointegration test and the vector error correction model were utilized in testing the variables. The findings from the unit root test did indicate stationarity at first difference 1(1). The cointegration (Johansen) test indicates that there was a nexus linking inflation and all the regressors adopted in the long term.Findings: The result of the VECM for the two estimated models shows a self-equilibrating mechanism of 14 per cent and 32 per cent for the first and second models respectively. The findings further reveal that the variables; liquidity ratio, policy rate (MPR), exchange rate, reserve requirement and treasury bills rate all had an effective impact on the inflation rate and that that effect was very significant. Hence, the CBN's monetary policy shocks do seem to have the expected traction on the Nigerian economy.Unique Contribution: The results make it pertinent for the CBN to utilize all the policy measures adopted in order to keep inflation within acceptable thresholds and prepare to keep inflation within the targeted range of 6-9 per cent, no matter the anticipated or unanticipated strong head winds.

Inflationary Trends and Its Determinants in Nigeria

“…In Nigeria, rising commodity prices indicate inflationary pressures, which have caught the attention of economic leaders (Okotori, 2017).…”

“…The International Monetary Fund (IMF) adds structural reforms to macroeconomic policy to complete an effective trio for macroeconomic stabilization (Okotori, 2017). Due to inflation, corruption, and unemployment, the Nigerian economy is underdeveloped despite its vast human and natural resources (Ojomolade, 2018).…”

“…Double-digit inflation reduces investment, production, and wages while increasing consumption. It diminishes financial asset returns and makes borrowers' and lenders' gains and losses unclear (Ojomolade & Oni, 2018;Okotori, 2017). Excessive inflation erodes GDP gains and hurts the poor, forcing government budgets to rise as budgetary imbalances solidify and macroeconomic instability returns.…”

“…Devaluation raised import prices, lowering agricultural output. Due to excessive financial institution lending to individuals and enterprises, inflation rose to 72.8% in 1995 (Okotori, 2017…”