Monetary Policy And Income Inequality In Nigeria: New Insights From ARDL Modelling

Abstract

This study examines the effect of monetary policy on income inequality in Nigeria from 1986 to 2021 using annual time-series data from the World Bank World Development Indicators. Income inequality is proxied by the Gini index, while monetary policy is captured through exchange rate, real interest rate, and inflation rate, with GDP per capita and unemployment included as control variables. The study employs the Autoregressive Distributed Lag (ARDL) bounds testing approach, supported by Augmented Dickey-Fuller unit root tests and Granger causality analysis. The unit root results show a mixed order of integration, I(0) and I(1), validating the ARDL framework. The bounds test confirms a long-run relationship among the variables. The long-run estimates indicate that exchange rate and GDP per capita have negative and statistically significant effects on income inequality, whereas inflation, real interest rate, and unemployment are statistically insignificant. In the short run, exchange rate and GDP per capita remain significant, while the error correction term is negative and significant, showing that about 22.4 per cent of disequilibrium is corrected annually. The Granger causality results reveal unidirectional causality from exchange rate to income inequality and from income inequality to GDP per capita. The findings identify exchange rate dynamics as the dominant monetary policy channel associated with income inequality in Nigeria. The study recommends more coherent exchange rate management, stronger domestic productive capacity, and better coordination between monetary, fiscal, and industrial policies to reduce the distributional effects of macroeconomic instability.