Monetary Policy Instruments and Inflation Control in Nigeria
Abstract
The study examines the impact of monetary policy instrument on inflation control in Nigeria during the period from1981 to 2021. In doing this, the ARDL approach to Cointegration and error correction modeling was employed to investigate the effectiveness of three monetary policy instruments, namely the monetary policy rate , the liquidity reserve ratio and Exchange Rate in the control of inflation in Nigeria in the short run and long run. The short-run and long-run effects of LRR on inflation was not significant even though it had a depressing effect on inflation in the short-run and long-run. The study finds that MPR negatively and significantly affects inflation in the short run (with a lag of one-year). The long-run effect of MPR is positive and significant. The effect of Exchange Rate on inflation was found to be negative and significant in the short-run and long-run, implying that Exchange Rate (EXR plays significant role in reducing inflation in the country. Based on these findings, the study recommends, as measure to achieve lower inflation, upwards adjustment of the MPR to reduce inflation in the short-run, and downward adjustment of same to reduce inflation in the long-run. It also recommends downward adjustment of the LRR as a measure to reduce inflation in the short-run and long-run. Further recommendation of the study is an upward adjustment of the Exchange Rate to achieve lower inflation in the short-run and long-run.
References
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Macroeconomic analysis of the relationship between monetary policy instruments and inflation in Nigeria. International Journal of Business and Management Review, 4(6), 31-39. P-ISSN 2695-186X Regression Results Unit Root Test Null Hypothesis: INFL has a unit root Exogenous: Constant Lag Length: 0 (Automatic-based on SIC ,maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -3.008460 0.0426 Test critical values: 1% level -3.605593 5% level -2.936942 10% level -2.606857 *Mac Kinnon (1996) one-sided p-values. Augmented Dickey-Fuller Test Equation Dependent Variable: D Method: Least Squares Date: 10/25/23 Time:15:47 Sample (adjusted): 19822021 Included observations: 40 after adjustments Variable Coefficient Std. Error t-Statistic Prob. INFL(-1) -0.384747 0.127888 -3.008460 0.0046 C 7.210010 3.230758 2.231678 0.0316 R-squared 0.192363 Mean dependent var -0.096571 Adjusted R-squared 0.171109 S.D. dependent var 14.80051 S.E.ofregression 13.47489 Akaike info criterion 8.088240 Sum squared resid 6899.762 Schwarzcriterion 8.172684 Log likelihood -159.7648 Hannan-Quinncriter. 8.118772 F-statistic 9.050830 Durbin-Watsonstat 1.601870 Prob (F-statistic) 0.004641 P-ISSN 2695-186X Null Hypothesis: LRR has a unit root Exogenous: Constant Lag Length: 0 (Automatic-based on SIC, max lag = 9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -2.979437 0.0477 Test critical values: 1% level -3.653730 5% level -2.957110 10% level -2.617434 *MacKinnon(1996)one-sidedp-values. Augmented Dickey-Fuller Test Equation Dependent Variable: D Method: Least Squares Date: 10/25/23 Time: 15:49 Sample (adjusted): 19822021 Included observations: 32 after adjustments Variable Coefficient Std.Error t-Statistic Prob. LRR (-1) -0.471558 0.158271 -2.979437 0.0057 C 24.06033 8.115701 2.964665 0.0059 R-squared 0.228336 Mean dependent var 1.001875 Adjusted R-squared 0.202614 S.D. dependent var 15.47770 S.E. of regression 13.82104 Akaike info criterion 8.150722 Sum squared resid 5730.632 Schwarz criterion 8.242331 Log likelihood -128.4116 Hannan-Quinncriter. 8.181088 F-statistic 8.877046 Durbin-Watsonstat 2.156175 Prob (F-statistic) 0.005676 P-ISSN 2695-186X Null Hypothesis: MPR has a unit root Exogenous: Constant Lag Length: 0 (Automatic-based on SIC, max lag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -3.334522 0.0198 Test critical values: 1%level -3.605593 5%level -2.936942 10%level -2.606857 *Mac Kinnon (1996) one-sided p-values. Augmented Dickey-Fuller Test Equation Dependent Variable: D Method: Least Squares Date: 10/25/23 Time: 15:50 Sample (adjusted): 19822021 Included observations: 40 after adjustments Variable Coefficient Std.Error t-Statistic Prob. MPR(-1) -0.410431 0.123085 -3.334522 0.0019 C 5.488496 1.676827 3.273143 0.0023 R-squared 0.226369 Mean dependent var 0.137500 Adjusted R-squared 0.206011 S.D. dependent var 3.452494 S.E. of regression 3.076382 Akaike info criterion 5.134092 Sum squared resid 359.6368 Schwarz criterion 5.218536 Log likelihood -100.6818 Hannan-Quinncriter. 5.164624 F-statistic 11.11904 Durbin-Watsonstat 2.255953 Prob (F-statistic) 0.001916 P-ISSN 2695-186X Null Hypothesis: LEXR has a unit root Exogenous: Constant Lag Length: 0 (Automatic-based on SIC, maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -2.134630 0.2328 Test critical values: 1% level -3.605593 5% level -2.936942 10% level -2.606857 *MacKinnon(1996)one-sidedp-values. Augmented Dickey-Fuller Test Equation Dependent Variable: D Method: Least Squares Date: 10/25/23 Time: 15:51 Sample (adjusted): 19822021 Included observations: 40 after adjustments Variable Coefficient Std.Error t-Statistic Prob. LEXR(-1) -0.046752 0.021902 -2.134630 0.0393 C 0.327659 0.088713 3.693479 0.0007 R-squared 0.107072 Mean dependent var 0.162142 Adjusted R-squared 0.083574 S.D. dependent var 0.284749 S.E.ofregression 0.272591 Akaike info criterion 0.287017 Sums quared resid 2.823618 Schwarz criterion 0.371461 Log likelihood -3.740331 Hannan-Quinncriter. 0.317549 F-statistic 4.556644 Durbin-Watsonstat 1.867625 Prob (F-statistic) 0.039302 P-ISSN 2695-186X Null Hypothesis: D has a unit root Exogenous: Constant Lag Length: 0 (Automatic-based on SIC, maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -5.362171 0.0001 Test critical values: 1% level -3.610453 5% level -2.938987 10% level -2.607932 *Mac Kinnon (1996) one-sided p-values. Augmented Dickey-Fuller Test Equation Dependent Variable: D (LEXR, 2) Method: Least Squares Date: 10/25/23 Time: 15:52 Sample (adjusted): 19832021 Included observations: 39 after adjustments Variable Coefficient Std.Error t-Statistic Prob. D(LEXR(-1)) -0.874268 0.163044 -5.362171 0.0000 C 0.143337 0.053517 2.678352 0.0110 R-squared 0.437287 Mean dependent var 0.000400 Adjusted R-squared 0.422079 S.D. dependent var 0.381213 S.E.ofregression 0.289803 Akaike info criterion 0.410688 Sum squared resid 3.107470 Schwarz criterion 0.495999 Log likelihood -6.008422 Hannan-Quinncriter. 0.441297 F-statistic 28.75288 Durbin-Watsonstat 1.993737 Prob (F-statistic) 0.000005 P-ISSN 2695-186X Dependent Variable: INFL Method: ARDL Date: 10/25/23 Time: 15:58 Sample (adjusted): 19832021 Included observations: 35 after adjustments Maximum dependent lags: 2 (Automatic selection) Model selection method: Akaike info criterion Dynamic regressors (2lags, automatic): LRRMPRLEXR Fixed regressors: C Number of models evaluated: 54 Selected Model: ARDL (2,0,2,0) Note: final equation sample is larger than selection sample Variable Coefficient Std.Error t-Statistic Prob.* INFL(-1) 0.690767 0.139735 4.943404 0.0000 INFL(-2) -0.430773 0.151036 -2.852116 0.0082 LRR -0.185973 0.124619 -1.492330 0.1472 MPR 0.039224 0.632739 0.061990 0.9510 MPR(-1) 0.204178 0.662256 0.308307 0.7602 MPR(-2) 1.542518 0.629448 2.450588 0.0210 LEXR -3.601722 1.202562 -2.995040 0.0058 C 15.05350 9.880755 1.523517 0.1393 R-squared 0.714962 Mean dependent var 20.17997 Adjusted R-squared 0.641064 S.D. dependent var 17.64562 S.E.ofregression 10.57172 Akaike info criterion 7.751874 Sum squared resid 3017.555 Schwarz criterion 8.107382 Log likelihood -127.6578 Hannan-Quinncriter. 7.874595 F-statistic 9.674899 Durbin-Watsonstat 1.604970 Prob (F-statistic) 0.000006 *Note: p-values and any subsequent tests do not account for model selection. P-ISSN 2695-186X -ARDL Bounds Test Date: 10/25/23 Time: 16:04 Sample: 19832021 Included observations: 35 Null Hypothesis: No long-run relationships exist Test Statistic Value k F-statistic 7.937718 3 Critical Value Bounds Significance I0 Bound I1 Bound 10% 2.72 3.77 5% 3.23 4.35 2.5% 3.69 4.89 1% 4.29 5.61 Test Equation: Dependent Variable: D Method: Least Squares Date: 10/25/23 Time: 16:04 Sample: 19832021 Included observations: 35 Variable Coefficient Std.Error t-Statistic Prob. D (INFL(-1)) 0.443421 0.145227 3.053306 0.0050 D -0.379464 0.583227 -0.650629 0.5208 D (MPR(-1)) -2.396600 0.572159 -4.188698 0.0003 C 8.753701 9.219344 0.949493 0.3508 LRR(-1) -0.173592 0.119643 -1.450917 0.1583 MPR(-1) 1.651582 0.589394 2.802168 0.0093 LEXR(-1) -2.253710 1.071132 -2.104045 0.0448 INFL(-1) -0.747723 0.132992 -5.622318 0.0000 R-squared 0.601708 Mean dependent var -1.106892 Adjusted R- squared 0.498447 S.D. dependent var 13.74674 S.E. of regression 9.735493 Akaike info criterion 7.587065 Sum squared resid 2559.055 Schwarz criterion 7.942573 P-ISSN 2695-186X Log likelihood -124.7736 Hannan-Quinncriter. 7.709787 F-statistic 5.827068 Durbin-Watsonstat 1.486273 Prob (F- statistic) 0.000344 ARDL Co-integrating And Long Run Form Dependent Variable: INFL Selected Model: ARDL (2, 0, 2, 0) Date: 10/25/23 Time: 16:08 Sample: 19812021 Included observations: 35 Co-integrating Form Variable Coefficient Std.Error t-Statistic Prob. D(INFL(-1)) 0.430773 0.151036 2.852116 0.0082 D -0.185973 0.124619 -1.492330 0.1472 D 0.039224 0.632739 0.061990 0.9510 D(MPR(-1)) -1.542518 0.629448 -2.450588 0.0210 D -3.601722 1.202562 -2.995040 0.0058 CointEq (-1) -0.740006 0.149969 -4.934387 0.0000 Cointeq=INFL-(-0.2513*LRR+2.4134*MPR- 4.8672*LEXR+20.3424) Long Run Coefficients Variable Coefficient Std.Error t-Statistic Prob. LRR -0.251312 0.168519 -1.491296 0.1475 MPR 2.413386 0.763107 3.162580 0.0038 LEXR -4.867153 1.552077 -3.135897 0.0041 C 20.342406 13.090322 1.554003 0.1318 P-ISSN 2695-186X Breusch-Godfrey Serial Correlation LM Test: F-statistic 0.079727 Prob.F(2,25) 0.9236 Obs*R-squared 0.221821 Prob.Chi-Square(2) 0.8950 Test Equation: Dependent Variable: RESID Method: ARDL Date: 10/25/23 Time: 16:10 Sample: 19832021 Included observations: 35 Presample and interior missing value lagged residuals settozero. Variable Coefficient Std.Error t-Statistic Prob. INFL(-1) -0.082002 0.220805 -0.371376 0.7135 INFL(-2) 0.006174 0.187296 0.032966 0.9740 LRR -0.014191 0.131872 -0.107610 0.9152 MPR 0.010026 0.656118 0.015281 0.9879 MPR(-1) 0.084897 0.704955 0.120430 0.9051 MPR(-2) 0.065933 0.664324 0.099248 0.9217 LEXR -0.110171 1.377131 -0.080000 0.9369 C 0.450383 10.77762 0.041789 0.9670 RESID(-1) 0.135604 0.341272 0.397348 0.6945 RESID(-2) 0.108758 0.328037 0.331541 0.7430 R-squared 0.006338 Mean dependent var 3.65E-15 Adjusted R-squared -0.351381 S.D. dependent var 9.420808 S.E. of regression 10.95159 Akaike info criterion 7.859802 Sum squared resid 2998.431 Schwarz criterion 8.304187 Log likelihood -127.5465 Hannan-Quinncriter. 8.013204 F-statistic 0.017717 Durbin-Watsonstat 1.614442 Prob (F-statistic) 1.000000 P-ISSN 2695-186X Heteroskedasticity Test: Breusch-Pagan-Godfrey F-statistic 1.135774 Prob.F(7,27) 0.3708 Obs*R-squared 7.961696 Prob.Chi-Square(7) 0.3360 ScaledexplainedSS 7.457768 Prob.Chi-Square(7) 0.3828 Test Equation: Dependent Variable: RESID^2 Method: Least Squares Date: 10/25/23 Time: 16:12 Sample: 19832021 Included observations: 35 Variable Coefficient Std.Error t-Statistic Prob. C 250.0300 143.0739 1.747559 0.0919 INFL(-1) 1.812420 2.023373 0.895742 0.3783 INFL(-2) -2.038357 2.187014 -0.932027 0.3596 LRR 0.617542 1.804490 0.342225 0.7348 MPR -6.313360 9.162092 -0.689074 0.4967 MPR(-1) 1.827510 9.589500 0.190574 0.8503 MPR(-2) 3.069988 9.114445 0.336827 0.7389 LEXR -43.08555 17.41317 -2.474308 0.0199 R-squared 0.227477 Mean dependent var 86.21586 Adjusted R-squared 0.027193 S.D. dependent var 155.2039 S.E. of regression 153.0791 Akaike info criterion 13.09742 Sum squared resid 632696.8 Schwarz criterion 13.45293 Log likelihood -221.2048 Hannan-Quinncriter. 13.22014 F-statistic 1.135774 Durbin-Watsonstat 1.559608 Prob (F-statistic) 0.370752 P-ISSN 2695-186X Ramsey RESET Test Equation: UNTITLED Specification: INFLINFL(-1) INFL(-2) LRRMPRMPR(-1) MPR(- 2) LEXRC Omitted Variables: Squares of fitted values Value df Probability t-statistic 2.997010 26 0.0059 F-statistic 8.982068 (1,26) 0.0859 F-test summary: Sum of Sq. df Mean Squares Test SSR 774.7937 1 774.7937 Restricted SSR 3017.555 27 111.7613 Unrestricted SSR 2242.762 26 86.26006 Unrestricted Test Equation: Dependent Variable: INFL Method: ARDL Date: 10/25/23 Time: 16:12 Sample: 19832021 Included observations: 35 Maximum dependent lags: 2 (Automatic selection) Model selection method: Akaike info criterion Dynamic regressors (2lags,automatic): Fixed regressors: C Variable Coefficien t Std.Error t-Statistic Prob.* INFL (-1) -0.628900 0.457121 -1.375786 0.1806 INFL (-2) 0.167671 0.239748 0.699363 0.4905 LRR 0.053031 0.135447 0.391525 0.6986 MPR -0.366107 0.572099 -0.639936 0.5278 MPR (-1) 0.459639 0.588026 0.781665 0.4415 MPR (-2) -0.629705 0.911664 -0.690720 0.4959 LEXR 0.757179 1.797639 0.421207 0.6771 C 12.33921 8.727708 1.413797 0.1693 FITTED^2 0.028825 0.009618 2.997010 0.0059 R-squared 0.788149 Mean dependent var 20.17997 AdjustedR-squared 0.722964 S.D. dependent var 17.64562 S.E.ofregression 9.287629 Akaike info criterion 7.512278 Sum squared resid 2242.762 Schwarzcriterion 7.912225 Log likelihood -122.4649 Hannan-Quinncriter. 7.650339 P-ISSN 2695-186X F-statistic 12.09098 Durbin-Watsonstat 1.613416 Prob (F-statistic) 0.000001 *Note: p-values and any subsequent tests do not account for model selection.
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