Monetary Policy Effectiveness in Nigeria's Inflationary Crisis: The Quantity Theory of Money Under Scrutiny

Abstract

Within the last ten years, the Nigerian economy has witnessed an unprecedented rise in the general price level which has adversely eroded past gains recorded to stabilize the economy. This study explores how effective the usage of monetary policy instruments (MPI) is in achieving stable price level. Time series data on variables of interest were sourced from the database of Nigeria’s Central Bank (CBN) and even the Development Indicators of the World Bank (WDI) from the year 1986 until the year 2023. This study conducted a stationarity test by employing the root test of ADF unit, while the model of Auto Regressive Distributed Lag (ARDL) was estimated with the aim of establishing the long-term relationship of the series. The results indicate Broad Money Supply (M3) and external debt positively affect inflation within Nigerian economy. Findings also indicate that real interest rate (RINT) as well as Exchange rate were significant but influences inflation negatively both on the short and long-term. These findings confirm the applicability of the postulations of the quantity theory of money in Nigeria’s inflationary crisis as well show external debt as having significant inflationary effect. The implication is that Inflation in Nigeria can significantly be tackled with MPI and a mix of fiscal policy tools to improve the productive capacity as well as achieve low price level and a stable Nigerian economy. This study thus recommends to the authorities on Monetary matters, that they should consider reviewing existing interest rates and then peg it at level that will reduce the inflation being experienced as well drive both local and foreign investment. Also, deliberate efforts must be put in place to regulate money supply and debt accumulation so as to bring macroeconomic instability to a significantly reduced level.