Monetary Policy, Central Bank Independence and Inflation Control in Nigeria

Enobong Mbobo and Ubong Effiong
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Enobong Mbobo: University of Uyo
Ubong Effiong: University of Uyo

African Journal of Commercial Studies, 2026, vol. 7, issue 4

Abstract: This study investigated the dynamic relationships determining inflation control in Nigeria, focusing on the interactions between monetary instruments, central bank autonomy, and fiscal policy. Utilizing annual time-series data spanning 1981 to 2023, the study employs the Autoregressive Distributed Lag (ARDL) bounds testing technique to evaluate short-run and long-run macroeconomic dynamics. The ARDL estimations reveal that the contemporaneous monetary policy rate has an insignificant short-run effect, while its one-year lag significantly reduces inflation, confirming policy transmission frictions. Broad money supply (M2) growth exerts a highly significant positive impact on inflation across both horizons, strongly validating the monetarist hypothesis. Regarding institutional design, central bank independence (CBI) and its one-year lag significantly lower short-run inflation by anchoring credibility; however, this effect becomes positive and insignificant in the long run, illustrating the operational limits of legal autonomy under persistent fiscal dominance. Finally, fiscal deficits exhibit a dual short-run effect, with contemporaneous deficits reducing inflation while lagged deficits increase it, but exert a significant negative impact on long-run price levels. This long-run negative relationship supports the productive capital expenditure hypothesis, suggesting that deficit financing moderates structural cost-push inflation when channelled into expanding productive capacity. Consequently, the study recommends establishing an institutionalized Fiscal-Monetary Coordination Council, enforcing strict caps on central bank credit to the government, transitioning toward an explicit inflation-targeting framework, and legally restricting deficit financing to high-yield infrastructure projects.

Keywords: Monetary Policy; Central Bank Independence; Fiscal Deficit; Inflation Control; ARDL Cointegration; Nigeria (search for similar items in EconPapers)
JEL-codes: C22 E31 E52 E58 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:cwk:ajocsl:2026-042

DOI: 10.59413/ajocs/v7.i4.8

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