Impact of Monetary Policy on Inflation in Nigeria: VECM Approach

The research examined the impact of monetary policy on inflation in Nigeria from 2000 to 2024. The study aimed to assess the influence of monetary policy tools such as interest rates, the cash reserve ratio (CRR), and money supply on inflation. Secondary data were sourced from central banks and relevant institutions. The study employed econometric tools, including unit root testing, co-integration analysis, and the Vector Error Correction Model (VECM), to investigate both short- and long-run dynamics. The findings revealed that monetary policy significantly affects inflation in the long run, with an error correction term (ECT) indicating that long-term disequilibria are adjusted at a speed of 40.3% annually. The money supply emerged as a critical determinant, exhibiting both long-run and short-run causal relationships with inflation. However, interest rates and the cash reserve ratio showed limited long-run convergence and short-run causality with inflation. Additionally, Granger causality tests highlighted unidirectional relationships between money supply and inflation, as well as between reserve ratios and interest rates. The study recommends implementing stringent contractionary monetary policies, such as increasing the CRR, to reduce liquidity and curb inflation. It also emphasizes the need for coordination between monetary and fiscal policies to minimize policy conflicts and enhance economic stability. Lastly, the Central Bank of Nigeria is urged to adopt robust inflation-targeting mechanisms to ensure transparency and accountability in managing inflation expectations