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How Effective are Monetary Policy Tools in Controlling Inflation in Nigeria? An Empirical Investigation

Author

Listed:
  • Ibrahim Ashiru

    (Department of Economics, Faculty of Management and Social Sciences, Nigerian Defence Academy, Kaduna, Nigeria)

  • David Joseph

    (Department of Economics, Faculty of Management and Social Sciences, Ibrahim Badamasi Babangida University, Lapai, Nigeria)

Abstract

In applying the monetary policy in controlling inflation, the monetary authorities employ a mix of tools, which when varied, transfer their effects to the target outcome of inflation control. Despite monetary authorities having employed series of strategies including recently, inflation targeting, the Nigerian inflation rates have remained uncontrollable, thereby, suggesting that the question could, however, be of the effectiveness of tools being employed. This study thus, examines the effectiveness of monetary policy rates, treasury bills rates and liquidity ratio in controlling inflation in Nigeria using annual data covering the period between 1981 and 2019. Unlike most existing studies that employed a combination of policy tools and intermediate outcomes, this study employed only monetary policy tools in its analysis. Results obtained from the estimated ARDL (2, 2, 1, 2) model suggest that both in the long-run and short-run, monetary policy rates have insignificant impact on inflation rates, thus, implying that they have been ineffective in inflation control. More so, treasury bills rates were found to be effective only in the short-run as lagged treasury bills rates showed a significant negative impact on inflation in the short-run while liquidity ratio proved effective only in the long-run with an unfavourable effect on inflation control in the short-run. It is recommended, therefore, that the monetary authorities reduce the size of the informal financial system by strengthening the official financial system in a bid to make the monetary tools of choice more effective for inflation control.

Suggested Citation

  • Ibrahim Ashiru & David Joseph, 2022. "How Effective are Monetary Policy Tools in Controlling Inflation in Nigeria? An Empirical Investigation," Timisoara Journal of Economics and Business, Sciendo, vol. 15(1), pages 1-22.
    • Handle: RePEc:vrs:timjeb:v:15:y:2022:i:1:p:1-22:n:1001
    DOI: 10.2478/tjeb-2022-0001
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    References listed on IDEAS

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    1. Nurudeen Abu, 2017. "Does Okun’s Law Exist in Nigeria? Evidence from the ARDL Bounds Testing Approach," Contemporary Economics, Vizja University, vol. 11(2), June.
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    Keywords

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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