Abstract
This study empirically examined the impact of monetary policy on inflation rate in Nigeria from 1985-2019. Being a time series data, and to avoid spurious regression result in our model, a test for stationary of the data using Augmented Dickey-Fuller unit root test was carried out. The variables; inflation rate, money supply, interest rate, exchange rate and government expenditure were found to be stationary at their second difference. Then Johansen co-integration technique was used to establish if the stationary variables are co-integrated in the long-run. The Trace statistic and the Max-Eigen values indicates that all the variables were found to be co-integrated in the long run. Further, ECM was employed to correct for any form of dis-equilibrium in the short run. The model specified inflation rate (INFL) as the dependent variable, while money supply (MSS) interest rate (INTR), exchange rate (EXR), and government expenditure (GEXP) were the independent variables. The ECM result revealed that MSS (positive impact), EXR (negative impact), and GEXP (negative impact) exerts a significant influence on inflation rate while INTR (negative impact) was found to be insignificantly related to inflation rate in Nigeria. It recommends amongst others, that the monetary authority should adopt indirect instruments for the purpose of controlling the volume and cost of money in circulation for an effective and efficient control of inflation rate in Nigeria. The study therefore concludes that the role of monetary policy in ensuring price stability (optimum inflation rate) cannot be overemphasized. The monetary authority through monetary instruments (financial variables) influences economic activities for the purpose of enhancing price stability and controlling inflation rate in Nigeria.
Keywords: Inflation rate, monetary policy, money supply, Interest rate, Total government expenditure, Nominal exchange rate.
