The Effect of Monetary Policy on Price Stability in Nigeria (1970 – 2014)

Abstract

The effect of monetary policy on price stability in Nigeria was empirically examined for the period 1970 to 2014 using time series data. The study employed the monetarist approach as its theoretical basis and used the Ordinary Least Square (OLS) regression technique to establish the empirical relationship among the variables of interest. The unit root and co-integration tests were conducted on all the variables and the result revealed the existence of stationarity and long run relationship, suitable for OLS estimation. The empirical results of the model showed monetary variables such as money supply, monetary policy rate and credit to private sector as percentage of GDP as having a positive relationship with inflation rate in Nigeria. The study further showed money supply growth to be significant which means that inflation in Nigeria is a monetary phenomenon. As expected, past inflation indicated a significant positive effect on current inflation while exchange rate significantly impacted on inflation rate. However, the dummy variable capturing the different phases of monetary policy was positive but insignificant which means that monetary policy was insufficiently effective in controlling price stability in Nigeria for the period under review. Therefore, it was recommended from the study that the Central Bank of Nigeria should implement monetary policy that is consistent with achieving price stability as the basis for macroeconomic stability and sustainable economic growth.