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This study investigates the efficiency of monetary policies in controlling inflation in Nigeria using annual data from 2000 to 2023 and applying the Autoregressive Distributed Lag (ARDL) approach. The analysis incorporates inflation as the dependent variable and Monetary Policy Rate (MPR), broad money supply (M2), exchange rate (EXR), gross domestic product (GDP), and foreign direct investment (FDI) as explanatory variables. The results reveal a stable long-run relationship among the variables, supported by a significantly negative error correction term that indicates rapid adjustment toward equilibrium after short-run shocks.
The findings show that exchange rate movements exert a strong positive and significant influence on inflation in both the short and long run, confirming that currency depreciation remains a major driver of price increases. Conversely, the monetary policy rate exhibits no significant impact on inflation, suggesting weaknesses in Nigeria’s monetary transmission mechanism. Broad money supply demonstrates a negative and significant relationship with inflation, implying that liquidity growth does not immediately fuel inflation and may be absorbed productively in the economy. GDP and FDI display mixed and lagged effects, with long-run impacts that highlight the importance of economic activity and investment in shaping long-term inflation dynamics.
The study concludes that while monetary policy is essential for managing inflation, its effectiveness in Nigeria is constrained by exchange rate instability, structural rigidities, and weak policy transmission. Strengthening monetary fiscal coordination, improving exchange rate management, enhancing financial sector depth, and promoting productive investment are crucial for achieving sustainable price stability.
The findings show that exchange rate movements exert a strong positive and significant influence on inflation in both the short and long run, confirming that currency depreciation remains a major driver of price increases. Conversely, the monetary policy rate exhibits no significant impact on inflation, suggesting weaknesses in Nigeria’s monetary transmission mechanism. Broad money supply demonstrates a negative and significant relationship with inflation, implying that liquidity growth does not immediately fuel inflation and may be absorbed productively in the economy. GDP and FDI display mixed and lagged effects, with long-run impacts that highlight the importance of economic activity and investment in shaping long-term inflation dynamics.
The study concludes that while monetary policy is essential for managing inflation, its effectiveness in Nigeria is constrained by exchange rate instability, structural rigidities, and weak policy transmission. Strengthening monetary fiscal coordination, improving exchange rate management, enhancing financial sector depth, and promoting productive investment are crucial for achieving sustainable price stability.
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