THE EFFECTIVENESS OF MONETARY POLICY TOOLS IN CONTROLLING INFLATION IN NIGERIA
ABSTRACT
This study investigated the effectiveness of monetary policy in controlling inflation in Nigeria using secondary annual data spanning from 1981 to 2019. Money Supply, Treasury bills rate, monetary policy rate and exchange rate were the variables used in the study to check inflation. The paper employed cointegration method to check for the long run relationship between the variables, Augmented Dickey Fuller unit root test to check if the variables are stationary or nonstationary, Granger causality test to know if the variables are unidirectional, bi-directional or have no causal relationship and Ordinary Least Square (OLS) was adopted because of its property of Best Linear Unbiased Estimator. The study commenced with the analysis of testing the variables of interest using Augmented Dickey Fuller (ADF) unit root test and the result indicates that the variables were non-stationary at level but was stationary at first differences. The Johansen cointegration test revealed the existence of long-run relationship between the variables. While the empirical result of the OLS test showed that monetary policy rate, money supply and treasury bill rates exert positive influence on inflation in Nigeria. While exchange rate depreciation leads to inflationary growth. This result is consistent with the prediction of economic theory. The study therefore concluded that money supply, treasury bills rate, monetary policy and exchange rate had influence on inflation within the period under consideration and recommends that since open market operation using annual Treasury bill rate as proxy has not been effective in managing inflation; therefore, schemes to make it more effective should be adopted perhaps by offering competitive rates and the monetary authority should re-assess the effectiveness of monetary policy rate given its ineffectiveness as a tool to manage inflation in Nigeria during the period.
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