MONETARY POLICY AND CONTROL OF INFLATION IN NIGERIA

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MONETARY POLICY AND CONTROL OF INFLATION IN NIGERIA

ABSTRACT

This study examined the effectiveness of monetary policy and control of inflation in Nigeria. The study adopted Augmented Dickey – Fuller (ADF), Johansen Co-integration and Error Correction Model (ECM) to evaluate the effect of money supply, interest rate and exchange rate on inflation rate in Nigeria. The results of the unit root test revealed that Inflation Rate, Money Supply, Exchange Rate and Interest were stationary at first difference while the result of the Johansen Co-integration Test revealed there is long run equilibrium relationship among the variables. The result of the Error Correction Model revealed that both Money Supply and Interest Rate are statistically significant in explaining variation in Inflation Rate while Exchange Rate is insignificant in explaining variation in Inflation Rate. It was however concluded that monetary policy has been partially effective in controlling in inflation rate in Nigeria. The study recommended that monetary authority should adopt adequate indirect instruments for the purpose of controlling the volume of money in circulation for effective and efficient control of inflation rate in Nigeria. Interest rate in Nigeria should be totally liberalized for the purpose of making it a strong monetary policy instrument of regulating price level and economic activities. The money market and its instruments should be adequately developed for the purpose of making it an effective control mechanism for inflation in Nigeria. A robust and effective exchange rate regime should be adopted by regulatory authorities in order to ensure exchange rate stability capable of controlling inflationary pressure in the economy

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