MONETARY POLICY AND INFLATION RATE IN NIGERIA: 1986-2016

Abstract

This study assessed the significance of monetary policy on inflationary rate in Nigeria from 1986 to 2016. Quarterly macroeconomic data sourced from CBN Statistical Bulletin were used. The Vector Autoregressive Model (VAR) was used for the estimation. The following variables were analyzed: Exchange Rate (EXR), Inflation Rate (INFR), Broad Money Supply (BMS), Interest Rate (INTR) and Reserve Ratio (RR). The result from the VAR model showed that interest rate, broad money and reserve ratio were not statistically significant during the period under review. However, exchange rate was significant and accounted for variations in inflationary rate. The co-integration test revealed a long run relationship between the variables while causality test showed a very weak transmission effect between the variables. Based on these findings, the study recommended that government should ensure proper coordination of policy instruments so that policy measures can be transmitted or channeled to effectively meet and control target objectives especially inflationary rate in Nigeria. Also, the government should ensure exchange rate stability; and most importantly, the multiple exchange rate system which is detrimental to our economy should be harmonized and sustained to ensure price stability.