Empirical Analysis of the Long Run Relationship between Inflation and Selected Monetary Policy Instruments in Nigeria
DOI:
https://doi.org/10.61143/umyu-jafr.1(2)2021.001Keywords:
Inflation rate, Monetary Policy instruments, Error Correction ModelAbstract
This paper examined the relationship between the inflation and the selected monetary policy instruments like money supply and monetary policy rate (MPR), among others in Nigeria relying on time series data spanned from the period of 1980 to 2020 sourced from National Bureau of Statistics (NBS) and World Bank Development Indicator (WDI). Hence, the study utilized Augmented-Dickey Fuller (ADF) and Philips Perron (PP) unit root test frameworks to examine the stochastic properties of the series for the variables under investigation. Subsequent to the results obtained from the unit root tests, the study employed Johansen Cointegration test and error correction model (ECM) as the method of estimation. On this account, the study revealed the presence of long run relationship between inflation rate and monetary policy in Nigeria; while the short run estimate shows that all the examined monetary policy instruments exhibit positive relationship with inflation rate in Nigeria. Implying that inflation rate rises as the examined monetary policy instruments rises. Also, the result form the estimated ECM shows that any deviation from the long run equilibrium in the short run can be restored back to the steady equilibrium state at 47.5% speed of adjustment. The study therefore recommends that: Pragmatic policy framework by the monetary policy authority needs to be drawn to aid the efficient management of exchange rate; MPR as monetary policy instrument must be anchored on efficient operating and monetary targets and; prudent regulation of money supply that is consistent to the prevailing output level in an economy.
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