THE STATISTICAL APPROACH ON THE EFFECT OF MONETARY POLICY ON ECONOMIC STABILITY: EVIDENCE FROM CENTRAL BANK INTEREST RATE DECISION
Abstract
This study examined the effectiveness of Central Bank of Nigeria interest rate decisions in promoting economic stability through their impacts on foreign exchange stability and financial market performance. Multiple regression analysis was employed on annual time series data spanning 2000 to 2024 (25 observations). Two models tested relationships between the monetary policy rate and foreign exchange stability and financial market performance, controlling for fiscal balance. Increases in MPR significantly improved foreign exchange stability (coefficient = 52.109) but substantially deteriorated financial market performance (coefficient = -2.154). Both models demonstrated strong explanatory power (R² > 56%). Fiscal balance emerged as a significant positive predictor in both models, underscoring the importance of fiscal-monetary policy coordination. CBN interest rate decisions significantly impact economic stability but reveal a fundamental policy trade-off: monetary tightening stabilizes exchange rates while undermining equity markets. Effective economic stabilization requires holistic approaches combining monetary policy with fiscal discipline, structural reforms, and diversified policy instruments beyond interest rate adjustments alone.
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