INFLATION, MONEY SUPPLY AND INTEREST RATE IN NIGERIA. (1980-2023)

The broad objective of the study was to examine the relationship between inflation, money supply and interest rate in Nigeria, using annual time series data for the period of 1980-2023. It also examined the impact of money supply on inflation, the effect of interest rate on inflation; and the combined impact of money supply and interest rate on inflation in Nigeria. The unit root test, utilizing both the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests, the lag order of the ARDL models using VAR lag order selection criteria, and the bound test were all carried out. World Development Indicators and Central Bank Statistical Bulletin were used to compile data on inflation, interest rate, public debt, exchange rate, money supply and other variables used in the study. The findings of this study reveal that money supply (MS) has an insignificant impact on inflation in Nigeria, suggesting that changes in broad money supply alone do not effectively influence inflationary trends, likely due to weak monetary policy transmission, structural inefficiencies, or limitations within the financial system. In contrast, interest rate (IR) exhibits a positive and statistically significant relationship with inflation, indicating that rising interest rates have not curbed inflation but are instead associated with higher price levels—possibly driven by cost-push factors and underlying structural weaknesses in the economy. When both variables are considered together, money supply remains insignificant, while interest rate continues to exert a significant influence, emphasizing that monetary policy strategies relying solely on money supply control may be inadequate. The study concludes that effective inflation management in Nigeria requires a more comprehensive monetary policy approach, with greater emphasis on interest rate dynamics and structural economic reforms.