IIARD International Institute of Academic Research and Development

INTERNATIONAL JOURNAL OF ECONOMICS AND FINANCIAL MANAGEMENT (IJEFM )

E-ISSN 2545-5966
P-ISSN 2695-1932
VOL. 2 NO. 3 2017

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Monetary Policy and Inflation Targeting in Nigeria

Dr. Joseph Okwori & John Abu

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Abstract

This study examined the efficacy of monetary policy in curbing inflation in Nigeria. Time series data between 1986 and 2015 were used and the Vector Error Correction Model was employed to give empirical content to the stated objectives. The study found out that monetary policy is significant in curbing inflation threshold in Nigeria, however the effect of monetary policy variables are weak in controlling inflation. This is as a result of the large proportion of informal sector which culminates into a high currency outside bank economy that is largely not affected by monetary policy tools. Also, non-popularity of monetary policy tools as a result of financial illiteracy accounts for its ineffectiveness. The Monetary Policy Rate (MPR) is not statistically significant which has also affected its transmission mechanism to commercial banks interest rate. This is as a result of commercial banks’ excess reserves which downplay the efficacy of the MPR in affecting interest rate and money supply. The study recommends amongst others that; first, the CBN should narrow the asymmetric corridor around the MPR to check commercial banks excess reserves. Required cash ratio and liquidity ratios should be adjusted regularly to curtail banks excess reserves; second, the CBN should embark on enlightenment campaigns in financial literacy to buttress popularity of monetary policy tools. Finally, commercial banks should expand their coverage to reduce the number of un-banked and under banked persons in the economy in order to reduce the dominance of the informal sector.

keywords:

Monetary Policy, Inflation, Money Supply, Interest Rate, Structuralist theory

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