An Assessment of the Impact of Monetary Policy on General Price Stability in Nigeria

Abstract

This study examined the effect of monetary policy on price stability in Nigeria using a data-rich framework spanning from 1986-2020 with the interest in exploring which of monetary policy has been effective in propelling price stability and how inflation responds to the monetary policy implementation. The main problem with the macro-economic policies that prompted this study was the fact that despite the series of the CBN Monetary Policy Committee decisions there is apparently no useful effect on inflation (price stability). The study employed Auto-regression Distributed Lag (ARDL) Bound Test for Co-integration of data analysis and Error Correction Model (ECM) estimation. The ADF test revealed that, inflation (INF), exchange rate (EXR) and broad money supply (M₂) were stationary at first difference 1(1); while monetary policy rate (MPR) and real interest rate (RIR) were stationary at level 1(0). The results of the ARDL bounds revealed that the null hypothesis of no long-run relationship were all rejected implying that a long-run effect exists among monetary policy variables and price stability. ECM coefficient of -0.0151 conforms with expectation. Durbin-Watson statistic of 2.2381 revealed that the model seems not to have any case of autocorrelation. The result of our analysis shows that EXR, M₂, and MPR have negative and insignificant on price stability, while RIR has negative and significant on price stability. The study concluded that monetary policy in Nigeria is does has insignificant impact on general piece stability. We, therefore, recommended that, for monetary policy to be more effective in ensuring price stability in Nigeria, the Central Bank of Nigeria should promote policies for greater financial inclusion.