Monetary Policy Toolkit and Inflation in Nigeria: Empirical Evidence in a Period of Exchange Rate Depreciation

The potency of monetary policy in contending inflation in Nigeria between 1981 and 2023 was examined in this paper. It used time series data from publications from the Central Bank of Nigeria and the World Development Indicators. The autoregressive distributed lag (ARDL) econometric procedure was used to analyze the study. The findings demonstrated that, consistent with presumptive predictions, the broad money supply, interest rate, openness, and real gross domestic product dynamics as monetary policy variables all positively correlate with Nigeria's inflation rate. In particular, the study found a statistically insignificant negative correlation between the fiscal deficit, population, and exchange rate at the current and lagged periods (first and second lags). The study recommended: the Federal government should consciously direct policy actions towards considering monetary policy adjustments to reduce lending rates, especially for SMEs, or small and medium-sized businesses. This intervention should commence within the next six months and should maintain a tight monetary policy stance to control inflation, with a target inflation rate below 10% within 12–18 months and adopt steps to stabilize the Naira, like better management of foreign exchange reserves management and promoting exports. The CBN should aim for significant exchange rate stabilization within 18 months.