Impact of monetary policy on price stability in Nigeria: An empirical assessment

Maxwell  Javan; Aniekan Akpansung

doi:10.60787/mjrdp.vol14no1.148

Authors

Maxwell Javan Department of Economics, Modibbo Adama University, Yola Author
Aniekan O. Akpansung Department of Economics, Modibbo Adama University, Yola Author

DOI:

https://doi.org/10.60787/mjrdp.vol14no1.148

Keywords:

Monetary policy, Price Stability, Consumer Price Index, ARDL, Granger causality, Nigeria

Abstract

Price stability is crucial for economic growth, yet it has remained a challenge in Nigeria despite ongoing monetary policy interventions by the Central Bank of Nigeria. This study examines the short- and long-run effects of monetary policy on price stability in Nigeria from 1981 to 2023. Using the Consumer Price Index (CPI) as a proxy for price stability, the analysis incorporates broad money supply (% of GDP), real interest rate, real exchange rate, and crude oil price as a control variable. Augmented Dickey-Fuller tests indicated mixed-order integration, supporting the application of the Autoregressive Distributed Lag (ARDL) bounds testing approach. The ARDL model identified a significant long-run relationship, with an error correction term (-0.76), suggesting that 76% of deviations from long-term equilibrium are corrected annually. In the long run, broad money supply positively influences CPI, with a 1% increase in money supply raising CPI by 1.75%, while higher real interest rates and real exchange rate appreciation reduce CPI by 1.31% and 8.26%, respectively. Crude oil prices negatively impact CPI, with a 1% increase reducing consumer prices by 17.81%. Granger causality tests indicate unidirectional relationships from CPI to money supply, crude oil price to money supply, real interest rate to real exchange rate, and crude oil price to real interest rate. The findings suggest that while monetary policy instruments significantly affect price stability, high autonomous price levels indicate that monetary policy alone cannot sustain price stability. Coordinated monetary, fiscal, and structural policy interventions are recommended to achieve effective price stabilization in Nigeria.

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