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

Ibrahim Ashiru and David Joseph
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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

Timisoara Journal of Economics and Business, 2022, vol. 15, issue 1, 1-22

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.

Keywords: Inflation; Monetary Policy; ARDL; Monetary Policy Rates; Liquidity Ratio; Treasury Bills (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:timjeb:v:15:y:2022:i:1:p:1-22:n:1001

DOI: 10.2478/tjeb-2022-0001

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