IMPACT OF SELECTED MONETARY POLICY INSTRUMENTS ON EXCHANGE RATE DYNAMICS IN NIGERIA: EVIDENCE FROM THE AUTOREGRESSIVE DISTRIBUTED LAG (ARDL) APPROACH

Abstract Exchange rate stability is fundamental to macroeconomic performance because it influences inflation, international trade, investment decisions, and overall economic growth. Despite the adoption of various monetary policy measures by the Central Bank of Nigeria, exchange rate volatility has remained a persistent challenge, particularly in the aftermath of oil price shocks, external financial disturbances, and structural imbalances. This study investigates the impact of selected monetary policy instruments on exchange rate dynamics in Nigeria using annual time-series data covering the period 1985–2025. Specifically, the study evaluates the effects of the Monetary Policy Rate, Money Supply, and Liquidity Ratio on the exchange rate while controlling for inflation and international crude oil prices. The Autoregressive Distributed Lag modelling framework was employed because of its suitability for estimating both short-run and long-run relationships among variables with mixed orders of integration. The results reveal the existence of a stable long-run relationship among the variables. Money supply emerged as the most influential monetary policy instrument affecting exchange rate movements in both the short and long run, while liquidity ratio exerted mainly transitory effects. Conversely, the monetary policy rate demonstrated limited long-run influence on exchange rate dynamics, suggesting that structural characteristics of the Nigerian economy weaken the interest-rate transmission mechanism. The findings underscore the importance of coordinated monetary, fiscal, and exchange rate policies in achieving exchange rate stability. The study contributes to the literature by providing one of the most comprehensive assessments of the monetary policy–exchange rate nexus in Nigeria over four decades of economic reforms and policy regime changes.