MONETARY POLICY AND PRICE STABILITY IN NIGERIA

Abstract

Inflation remains a persistent challenge in Nigeria, driven by rising prices of goods and 
services, which create uncertainty and discourage investment. Structural issues such as reliance 
on oil revenue, limited economic diversification, and political instability further complicate 
monetary policy efforts to maintain price stability. This study examines the impact of monetary 
policy tools on inflation in Nigeria, focusing on the monetary policy rate (MPR), money supply 
(MS), exchange rate (ER), lending rate (LR), petrol price (PP), and import commodity price 
index (ICP). Using annual time-series data from 1981 to 2023, the Autoregressive Distributed 
Lag (ARDL) model is applied to analyse both short- and long-run dynamics. The results show 
that money supply, petrol prices, and import prices have statistically significant positive effects 
on inflation, identifying them as key inflationary drivers. Conversely, the effects of the MPR 
and lending rate are not statistically significant, indicating that interest rate policies alone may 
not effectively curb inflation. Granger causality analysis reveals a unidirectional causality from 
exchange rate to inflation, highlighting the importance of exchange rate stability. The study 
recommends that the Central Bank of Nigeria adopt an inflation-targeting framework, enhance 
policy transparency, and align monetary policy with supportive trade and fiscal strategies. 
Structural reforms aimed at economic diversification and reduced reliance on oil revenue are 
also essential to improving monetary policy effectiveness and ensuring long-term price 
stability.