Inflation Dynamics and Monetary Policy Effectiveness in Nigeria: An ARDL Approach

This study investigated the effect of monetary policy on inflation rate in Nigeria from 1990 to 2024. This was achieved by collecting data from the World Bank and Central Bank of Nigeria Statistical Bulletin. Using the Autoregressive Distributed Lag approach, data was analyzed, and from the findings of data analysis, it was evident that monetary policy rate had a negative and insignificant effect on inflation rate in Nigeria in the short run. Money supply growth had a positive and significant effect on inflation rate in Nigeria in the short run. Prime lending had a positive and insignificant effect on inflation rate in Nigeria in the short run. Monetary policy rate, money supply growth, and prime lending had a positive and insignificant effect on inflation rate in Nigeria in the long run based on the time covered in this study. This means that the Central Bank of Nigeria can influence the rate of inflation in Nigeria in the short run through the supply of money. However, the influence of monetary policy may not be significant in the long run because the monetary policy may not be able to reduce the inflation rate, as the Nigerian economy is highly exposed to global economic shocks. The coefficient -0.193393 means that 19.33% errors are corrected in the short run to ensure convergence in the long run. The study recommends that the authorities should not rely solely on MPR to influence the inflation rate in the country. Instead, to strengthen the monetary policy, the authorities should increase sectoral participation and encourage financial inclusion. To reduce the inflation rate in Nigeria, the central bank should apply a strict contractionary monetary policy. In other words, to reduce the inflation rate and maintain it at reasonable levels, that is, at single digits, the monetary policy authorities should work hand-in-hand with the fiscal authorities.