MONETARY POLICY INSTRUMENTS AND INFLATION TARGETING IN NIGERIA: EVIDENCE FROM AUTOREGRESSIVE DISTRIBUTED LAG MODEL

Abstract

This study examined the impact of monetary policy instruments on inflation targeting in Nigeria over the period of1980-2017. To achieve the objective of the study, annual time series data on inflation target rates (INFTR), monetary policy rate (MPR), commercial banks deposit rate (CBDR), commercial banks deposits with CBN (CBDC) and reserve requirements (RRQT) was collected from the database of the Central Bank of Nigeria (CBN) (2018). The data was analysed using the autoregressive distributed lag (ARDL) model. The result of the long-run ARDL coefficients showed that monetary policy rate (MPR), commercial banks deposit rate (CBDR), commercial banks deposits with CBN (CBDC) and reserve requirements (RRQT) had significant impacts of -0.0095, -0.1803, -0.8055 and -0.0188 respectively, on INFTR. Furthermore, the coefficient (-0.518) of the short-run error correction term was consistent with the expected negative sign, implying that there is a high speed of adjustment from short-run to long-run equilibrium among the variables of the study. In addition, the estimated results had passed all the diagnostic tests, suggesting that the results were fairly robust. In view of the findings, the study recommended that the CBN should narrow the asymmetric corridor around the MPR to check commercial banks excess reserves. Also, reserve requirement should be adjusted regularly to curtail banks excess reserves. The CBN should equally embark on enlightenment campaigns on financial literacy to buttress popularity of monetary policy instruments. This could be done by partnering with institutions, schools and organizations.

Keywords: Inflation targeting, monetary policy, ARDL