Monetary Policy Variables And Inflation Rate In Nigeria (1986 – 2024)

Abstract

Persistent inflation has continued to challenge Nigeria’s macroeconomic stability and the effectiveness of monetary policy. This study investigates the impact of key monetary policy variables, Monetary Policy Rate (MPR), Cash Reserve Ratio (CRR), and Exchange Rate (EXR), on inflation in Nigeria from 1986 to 2024. Using annual data from the Central Bank of Nigeria (CBN) and the World Development Indicators (WDI), the study applies the Auto-Regressive Distributed Lag (ARDL) model alongside unit root, cointegration, and Granger causality tests to examine both short- and long-run dynamics. Results reveal that a 1% increase in MPR raises inflation by 1.92% in the short run and 4.90% in the long run, indicating a strong positive relationship. The CRR shows an insignificant short-run effect but a long-run negative impact, where a 1% rise reduces inflation by 1.40%. Exchange rate movements exhibit mixed outcomes: a 1% depreciation lowers inflation by 2.20% in the short run but increases it by 2.66% in the long run. The error-correction term of -0.83 suggests rapid adjustment to the long-run equilibrium. The study recommends that the Central Bank of Nigeria apply cautious and coordinated adjustments to the MPR, utilize CRR strategically for long-term inflation control, and adopt integrated exchange rate and structural policy reforms to strengthen monetary policy effectiveness.