Nigerian Monetary Policy (1991-2021): Money Supply Rate and Inflation Rate

Abstract

Monetary policy can be so dicey or delicate that it requires great tact from the monetary authority. Contractionary monetary policy, when pushed too far, drags the economy to recession while` extreme expansionary monetary policy sinks the economy to liquidity trap. Central banks are in charge and are expected to favorably run the monetary policy by adjusting interest rates, influencing local lending rates, buying foreign currency, printing money, and use of other tools to modulate currency exchange rates, manage inflation, etcetera, with a sole target of creating a healthy economy. This study looks into the effect of money supply rate, exchange rate and interest rate on inflation rate in Nigerian economy between 1991 and 2021. With secondary data, the variables are found to be of mixed order of integration and, therefore, the ARDL model is our parameter estimator. Our model is found to be stable and our empirical investigation reveals that both money supply rate and interest rate in Nigeria have no significant effect on Nigeria’s inflation rate while exchange `rate has a significant inverse effect on Nigeria’s inflation rate – the less favorable the exchange rate, the more biting the inflation. The study is wrapped up `with a recommendation that Nigerian government/authorities should rise up to occasion of fixing the insecurity challenges of the nation so as to create safe environment that can attract local investments as well as foreign direct investments which, among other benefits, will be favorable to Nigeria in exchange rate.