The Effect of Monetary Policy Instruments on Inflation in Nigeria

This study investigates the effect of monetary policy instruments on inflation in Nigeria over the period 1990
to 2024. The primary objective is to examine how key monetary policy tools monetary policy rate, open
market operations, and reserve requirement influence inflation dynamics within the Nigerian economy. The
study utilizes secondary data obtained from the Central Bank of Nigeria (CBN), National Bureau of Statistics
(NBS), and other reputable sources. The data were analyzed using descriptive statistics, unit root tests, and
multiple regression analysis, ensuring the validity of the model through diagnostic tests such as the Breusch
Godfrey test, heteroskedasticity test, and variance inflation factor analysis. The findings reveal that none of
the monetary policy instruments examined had a statistically significant effect on inflation during the study
period. Specifically, the monetary policy rate, open market operations, and reserve requirement all exhibited
insignificant coefficients, suggesting that conventional monetary policy tools may not be effective in
addressing inflationary pressures in Nigeria. This outcome points to the limitations of Nigeria's monetary
transmission mechanisms, as well as the potential dominance of other macroeconomic factors such as
exchange rate volatility, fiscal policy, and structural constraints. The study concludes that while monetary
policy is an essential tool for macroeconomic management, its current application in Nigeria may not be
sufficient to control inflation effectively. Consequently, it is recommended that policymakers adopt a more
integrated policy approach that includes coordinated fiscal strategies, structural reforms, and enhanced
monetary policy transmission mechanisms. Additionally, future research should explore the role of other
macroeconomic variables in influencing inflation and assess the impact of unconventional monetary policy
tools within the Nigerian context.