The Impact of Monetary Policy on Price Instability in Nigeria
DOI:
https://doi.org/10.70861/ujed20250202011Abstract
This study examines the long- and short-run effects of monetary policy instruments on inflation in Nigeria from 1981 to 2024 using annual time series data and ARDL modelling approach. The bounds test confirms a stable long-run relationship. The findings reveal a persistent underlying inflationary trend of 9.35% annually, underscoring the role of structural factors. In the long run, only the liquidity ratio exerts a significant, negative influence on inflation, confirming its potency as a direct monetary control tool. The monetary policy rate, while correctly signed, is statistically insignificant, indicating a weakened interest rate transmission channel. Counterintuitively, the Treasury bill rate shows a marginally significant positive long-run association with inflation, suggestive of fiscal dominance and deficit monetization. Short-run dynamics are characterized by strong inflationary inertia and a complex, positive impact of the lagged liquidity ratio. The error correction term of -0.96 indicates a rapid 96% adjustment to equilibrium. The study concludes that while the liquidity ratio is effective for long-term inflation control, achieving price stability in Nigeria requires complementary fiscal and structural reforms to address foundational pressures and enhance monetary policy transmission.
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