Digital Payments and Inflation Dynamics in Nigeria

Abstract

Recognizing the growing importance of digital payment transformation in determining domestic price movement, as well as their interaction with monetary policy and economic efficiency in a rapidly evolving financial landscape like Nigeria, this study investigates both the short-run and long-run relationships between digital payments and inflation dynamics in Nigeria. Employing the Autoregressive Distributed Lag (ARDL) modeling framework. The analysis incorporates key macroeconomic variables, namely, total value of digital payment transactions, money supply, output, and the monetary policy rate, using monthly data spanning from January 2012 to June 2024. The results of the bounds testing procedure reveal the existence of a long-run relationship between inflation and the explanatory variables. The findings indicate that digital payment systems contribute more to inflationary tendencies in both short and long run, primarily by enhancing transaction efficiency and potentially increasing the velocity of money. In addition, the results confirmed theoretical expectations that money supply and the monetary policy rate remain central instruments for managing inflation. Based on these empirical insights, the study advances policy recommendations aimed at harnessing the growth of digital payment systems to strengthen inflation control by deepening the financial market system, promoting financial inclusion, improving economic efficiency, and enhancing effective monetary policy transmission. The continued development of digital payment systems can also support effective monitoring and regulation of the money supply, thereby enabling more precise and responsive policy interventions.