The Impact of Monetary Policy and Inflation on Economic Growth in Nigeria (1999-2022)

ABSTRACT The study examined monetary policy operations, inflation and economic growth in Nigeria from 1999-2022. The primary purpose is to evaluate the impact of monetary policy operations, inflation on Nigeria’s economic growth. Inflation has a mild effect on economic activities, while above it, the magnitude of the positive effect of inflation on growth was high. The positive and significant relationship between inflation and economic growth for inflation rates both below and above the threshold level is robust with respect to changes in econometric methodology, additional explanatory variables and changes in data frequency. These finding are essential for monetary policy formulation as it provide a guide for the policy makers to choose an optimal target for inflation, which is consistent with long-term sustainable economic growth goals of the country. The data for the study were obtained from World Bank, National Bureau of statistics (NBS) database and Central Bank of Nigeria CBN statistical bulletin. The econometric methods of Co-integration, Vector Error Correction Model (VECM), Impulse Response Functions and Forecast Error Variance Decomposition (FEVD) were employed to examined the interplay among the critical variables. Gross Domestic Product (GDP) was employed as the variable of interest while exchange rate, inflation rate, money supply, interest rate and natural log of government spending expenditure (InGSE) as instrument of monetary policy operations. The study discovered that the explanatory variables were not statistically significant at 5% level in stimulating economic growth in Nigeria. However, the long-run dynamic result also shows that there exists a long-run relationship or equilibrium among the variables. The result of vector error correction model (VECM) revealed that inflation and exchange rate has negative coefficients, indicating a negative relationship with GDP. These finding hold significant implications for the Nigerian economy, highlighting the effectiveness of monetary policy, the importance of exchange rate stability, and the imperative of inflation control in promoting sustained economic growth. Policymakers are urged to prioritize evidence-based decisions, long-term planning, and target interventions to harness the full potential of monetary policy in driving sustainable economic development in Nigeria.