Monetary Policy Instruments and Inflation Rate in Nigeria

Abstract

This research work examined the impact of monetary policy instruments on inflation rate in Nigeria within the epoch of 1981 to 2022. Data was sourced from CBN statistical bulletin. Inflation rate (INF) was utilized as an endogenous variable while the exogenous variables were interest rate (ITR), exchange rate (EXR), Open market operation proxied by treasury bill rate (TBR), reserve requirement ratio (RRR) and money supply (MS) used as controlled variable. Consequently, this research made use of Ex-Post Factor research design in which multiple regression method of analysis was used. Augmented Dickey Fuller (ADF), Philip Perron (PP), Zivot-Andrews (ZA) and Dynamic ARDL were employed as the research techniques, specifically for unit root tests and estimation of the long run and short run relationship of the variable. The outcomes indicated that: interest rate has negative and significant impact on inflation rate in Nigeria by contributing to 2.57% and 2.03% decrease in INF in short and long run periods respectively. On the other hand, Open market operation proxied by treasury bill rate has positive and significant impact on inflation rate in Nigeria by contributing to 0.11% and 0.005% increase in INF in short and long run periods respectively. On the contrary, reserve requirement ratio negatively and insignificantly impacted on inflation rate by leading to 0.26% and 0.04% decrease in INF in the short and long run periods respectively. Similarly, exchange rate had adverse and significant effect on rate of inflation in Nigeria by contributing to 10.9% and 2.6% decrease in INF in both the short and long run periods respectively. Lastly, supply of money has positive and significant effect on inflation rate in Nigeria by contributing to 0.46% and 0.66% increase in INF in the short and long run periods respectively. Consequently, this work recommends that CBN should maintain a contractionary monetary policy with the capacity to restrain too much supply of money, so as to mitigate rate of inflation in the country. This measure will drastically minimize the volume of money circulating outside the banks which is identified as responsible for the rising rate of inflation in Nigeria. Again, CBN should liberalize interest rate such that will reduce prime lending rate and thereby encourage productive investment which will reduce inflation rate in Nigeria.