Monetary Policy Changes and Inflationary Pressure in Nigeria

Achieving price stability has continued to be one of the major macroeconomic policy objectives of successive governments in Nigeria. This is because, inflation rate, as measured by changes in consumers price index (CPI), has continued to be on the increase despite the implementation of monetary policy measures to control it. Therefore, the main objective of this study is to analyze the impact of monetary policy changes on inflationary pressure in Nigeria. This is to identify whether inflationary pressure in Nigeria is a monetary phenomenon or not. Annual time series data on changes in inflation rate, broad money supply, net domestic credit, monetary policy rate, real GDP growth rate (real output) and exchange rate were collected from Central Bank of Nigeria (CBN) Statistical Bulletin, 2018 issue. To analyze the data, Autoregressive Distributed Lag (ARDL) model, applying bounds test, was adopted. The empirical results show that monetary variables (broad money supply, net domestic credit, monetary policy rate) have insignificant impact on inflation both in the short run and long run respectively. Real output has the expected negative sign and its impact on inflation is significant both in the short run and long run. This implies that inflation in Nigeria is more of output than monetary phenomenon. It is recommended that Nigeria should invest more in agricultural sector since more output is sourced from the sector. This will help to reduce food (price) inflation in the country.