MONETARY POLICY AND INFLATION TARGETING IN NIGERIA (1990 - 2023)

ABSTRACT Ongoing inflation in Nigeria, despite various monetary policy actions, raises concerns about how effective the country's inflation-targeting framework is. The Central Bank of Nigeria (CBN) has employed different policy measures, particularly the Monetary Policy Rate (MPR), to control inflation over the years. Inflation has been unstable and frequently surpasses the target levels. The ongoing increase in consumer prices, along with changes in exchange rates and inflexible structures, weakens the effectiveness and reliability of monetary policy initiatives. These issues emphasize the importance of evaluating whether Nigeria's monetary policy effectively responds to inflation trends or if it mainly reacts to external factors. This study analyzes how monetary policy affects inflation targeting in Nigeria from 1990 to 2023. The study examines how the policy instruments of the Central Bank of Nigeria, especially the Monetary Policy Rate (MPR), react to changes in inflation, including the inflation gap, consumer price index (CPI), and variations in exchange rates. The research is based on the New Keynesian Phillips Curve (NKPC), which highlights the importance of expectations and variations in inflation in influencing monetary policy decisions. Annual time series data were obtained from the Central Bank of Nigeria, the National Bureau of Statistics, and the World Development Indicators. The Autoregressive Distributed Lag (ARDL) model was used to analyze both short-run and long-run relationships. This included conducting unit root tests, diagnostic tests, and applying the Error Correction Model (ECM) for dynamic adjustments. The results indicate that the exchange rate has a significant and positive effect on the monetary policy rate (MPR), implying that monetary policy responds more strongly to a decline in currency value than to inflation measures. The inflation gap and the Consumer Price Index (CPI) were not statistically significant in influencing the Monetary Policy Rate (MPR), suggesting a limited commitment to formal inflation targeting. The ECM results indicate that there is a long-term stable relationship, with approximately 60% of short-term imbalances being adjusted each year. The study finds that Nigeria's monetary policy is not very effective in targeting inflation, primarily because of structural limitations, ineffective transmission processes, and external i