Effectiveness Of Monetary Policy Tools In Controlling Inflation In Nigeria (1981-2024)

Abstract

The study evaluated the effectiveness of monetary policy tools in controlling inflation in Nigeria using time series data from 1981 to 2024. It examined the impact of the monetary policy rate on the exchange rate, its effect on inflation, and the causal relationship between money supply and inflation. Employing the Autoregressive Distributed Lag (ARDL) model and the Granger causality test, the unit root tests (ADF and PP) confirmed different degrees of integration, while the Bound Test validated long-run relationships. The Error Correction Model (ECM) indicated that inflation adjusts toward equilibrium at a rate of 37% per year, with past liquidity expansion contributing to current inflation. The findings revealed that money supply, monetary policy rate, liquidity ratio, and GDP significantly influence inflation, with money supply increasing inflation, while the monetary policy rate and GDP help reduce it in the long run. However, structural constraints limit the effectiveness of monetary policy, necessitating broader economic reforms. Based on the findings, the study recommends ensuring close collaboration between monetary and fiscal authorities to align policies and improve inflation control; managing liquidity through targeted monetary measures to prevent excessive money supply from fueling inflation; investing in key sectors and improving productivity to reduce supply-side constraints and stabilize prices; and maintaining transparency, consistent communication, and central bank independence to anchor inflation expectations and improve policy effectiveness.