EFFECTIVENESS OF MONETARY POLICY AND INFLATION DYNAMICS IN NIGERIA

Abstract

This paper examines the monetary policy effectiveness and
inflation dynamics in Nigeria using the Autoregressive Distributed
Lagged (ARDL) Cointegration Bound test. Quarterly time series
data from 2006:1 - 2020:4 for inflation, money supply, monetary
policy rate, liquidity ratio, and cash reserve requirement were used
in the empirical analysis. The result of the bound test suggests that
there exists a long-run cointegration relationship between inflation
and the monetary policy variables included in the model. The result
of the ECT coefficient is negative and statistically significant at the
5% significance level thereby supporting the result of the Bound
test on the existence of a long-run relationship between the
variables. The ARDL short-run estimates show that all the selected
monetary policy instruments have a predictable influence on the
inflation rate with varying lags. While the long-run estimates
indicated that only the monetary policy rate and cash reserve ratio
significantly influence the inflation rate. The result of the granger
causality test shows a bidirectional causality between broad money
supply and inflation rate and a unidirectional causality running
from inflation rate to liquidity ratio. The study concluded that
monetary policy instruments deployed by the CBN seem to have the
anticipated traction on the inflation rate. Hence, it is pertinent for
the CBN to continue the utilization of all the policy measures
adopted to keep inflation within acceptable thresholds, with
emphasis on the monetary policy rate and cash reserve ratio for
long-run objectives