CBN monetary policy and inflation nexus in Nigeria: an empirical approach

Okotori, Tonprebofa and Gbalam, Eze (2020): CBN monetary policy and inflation nexus in Nigeria: an empirical approach. Published in: American Journal of Economics , Vol. 4, No. Issue 1 No.2 (24 July 2020): pp. 15-35.

Abstract

The study explored monetary policy effect on inflation stabilization in Nigeria. Increasing levels of indebtedness may have reduced the fiscal space for fiscal policy intervention and this leaves monetary policy as the real tool of choice for macroeconomic stabilization. The question we need to ask then is, how effective is this tool of choice? Monthly time series data from 2009-2018 were used in estimating the model. The ADF test for the stationarity, the johansen cointegration test and the vector error correction model were utilized in testing the variables. The findings from the unit root test did indicate stationarity at first difference 1(1). The cointegration (Johansen) test indicates that there was a nexus linking inflation and all the regressors adopted in the long term. The result of the VECM for the two estimated models shows a self-equilibrating mechanism of 14 per cent and 32 per cent for the first and second models respectively. The findings further reveal that the variables; liquidity ratio, policy rate (MPR), exchange rate, reserve requirement and treasury bills rate all had an effective impact on the inflation rate and that that effect was very significant. Hence, the CBN's monetary policy shocks do seem to have the expected traction on the Nigerian economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Central Bank of Nigeria; vector error correction model; augmented dickey fuller; monetary policy; cointegration; unit root
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; G - Financial Economics > G2 - Financial Institutions and Services

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