Economics Project Topics

The Role of Monetary Policy on Inflation in Nigeria

The Role of Monetary Policy on Inflation in Nigeria

The Role of Monetary Policy on Inflation in Nigeria

Chapter One

Objectives of the Study

The study sought to achieve the following three specific objectives:

  1. Investigate the impact of interest rates on inflation in Nigeria.
  2. Assess the relationship between exchange rates and inflation in the Nigerian economic context.



Conceptual Review

Monetary Policy

The effectiveness of monetary policy in the Nigerian economic context is crucial for maintaining financial stability and managing inflationary pressures. Monetary policy, as a foundational concept, involves the use of various tools by the central bank to control and regulate the money supply within an economy. Adesoye, Maku, and Atanda (2022) assert that an in-depth exploration of monetary policy is essential to understanding its implications for inflation in Nigeria.

Monetary policy primarily aims to achieve macroeconomic goals such as price stability, full employment, and sustainable economic growth (Jhinghan, 2018). In the Nigerian context, where inflation has been a persistent challenge, the objectives of monetary policy gain added significance. The Central Bank of Nigeria (CBN), as the primary authority responsible for monetary policy formulation, employs tools like interest rates, exchange rates, and cash reserve requirements to influence the money supply and, consequently, inflation (Central Bank of Nigeria, 2019).

Interest rates, a key instrument of monetary policy, are adjusted to influence borrowing costs and, subsequently, spending and investment levels. The CBN utilizes interest rate changes to manage inflationary pressures effectively (Gbadebo & Mohammed, 2021). By increasing interest rates, borrowing becomes more expensive, leading to reduced spending and investment, which can help curb inflation. Conversely, lowering interest rates can stimulate economic activity but may contribute to inflation if not carefully managed.

Exchange rates also fall under the purview of monetary policy, particularly in an import-dependent economy like Nigeria. Fluctuations in exchange rates can impact the prices of imported goods, thereby influencing overall inflation levels. A depreciating local currency can lead to higher import costs, contributing to cost-push inflation (Bayramoglu & Allen, 2019). The CBN’s interventions in the foreign exchange market are strategic moves aimed at influencing exchange rates to manage inflationary pressures effectively.

The cash reserve ratio, another essential tool of monetary policy, involves the percentage of deposits that banks are required to hold as reserves. By adjusting the cash reserve requirements, the CBN can influence the amount of money banks lend and, consequently, control inflation (Onwachukwu, 2020). A higher cash reserve requirement reduces the money available for lending, curbing spending and inflation.

Understanding the multifaceted role of monetary policy in Nigeria is critical for policymakers and stakeholders alike. The nuanced approach to defining and operationalizing monetary policy ensures that its objectives align with the specific economic challenges faced by the country. The empirical evidence and studies conducted by researchers, such as those by Adesoye, Maku, and Atanda (2022), provide insights into the practical implications of monetary policy tools on inflation dynamics, offering a comprehensive understanding of the nuances involved.

In summary, exploring the definition and objectives of monetary policy in Nigeria reveals its pivotal role in addressing inflationary challenges. The central bank’s use of tools like interest rates, exchange rates, and cash reserve requirements underscores the intricate nature of monetary policy and its direct impact on inflation. A thorough comprehension of these dynamics is essential for policymakers and stakeholders to formulate effective strategies for achieving macroeconomic stability and controlling inflation in Nigeria.





The methodology section of this research is crucial as it outlines the framework used to investigate the intricate dynamics between monetary policy and inflation in Nigeria. To ensure a robust and systematic approach, this study draws upon a combination of qualitative and quantitative research philosophies, aligning with the mixed-methods research design (Creswell & Creswell, 2018; Tashakkori & Teddlie, 2017). The comprehensive nature of the mixed-methods approach allows for a holistic exploration of the research problem, combining the strengths of both qualitative and quantitative data (Saunders et al., 2016).

Research Design

The choice of a correlational research design is rooted in the need to understand the relationships between various macroeconomic variables and inflation rates in Nigeria. This design is suitable as it allows for the examination of associations and patterns among different factors without manipulating any variables (Goddard & Melville, 2020). Given the complex nature of economic phenomena, a correlational design provides a nuanced perspective on the interconnectedness of monetary policy tools and inflation.

Population of the Study

The population under investigation encompasses all macroeconomic variables relevant to the study. This includes, but is not limited to, interest rates, exchange rates, money supply, and cash ratios. By incorporating a broad spectrum of variables, the study aims to capture the multifaceted nature of the monetary policy and inflation relationship.







Summary of Findings

The analysis of macroeconomic variables in Nigeria spanning the period from 2010 to 2022 has provided valuable insights into the complex interplay among GDP growth, unemployment rates, exchange rates, interest rates, and inflation. This examination utilized data presented in Tables 4.1 to 4.6, employing descriptive statistics, regression analyses, and correlation estimates. The overarching aim was to discern patterns, relationships, and potential implications for Nigeria’s economic landscape.

Descriptive statistics in Table 4.1 showcased the central tendencies and distribution of macroeconomic variables. Notably, GDP growth exhibited a mean of 3.73%, reflecting a moderate positive trend over the period. The unemployment rate, with a mean of 5.47%, pointed to relatively stable labour market conditions. Exchange rates, with a mean of 259.13, exhibited notable volatility. Interest rates, with a mean of 3.94%, indicated a comparatively steady monetary policy. The inflation rate, with a mean of 13.08%, highlighted persistent inflationary pressures.

Moving to the regression analysis summarized in Table 4.2, the model’s R-squared value of 0.652 indicates that around 65.2% of the variation in inflation can be explained by the chosen predictors – GDP growth, unemployment rates, exchange rates, and interest rates. The adjusted R-squared of 0.479 suggests a reasonable fit, considering the inclusion of multiple predictors. The model’s overall significance was confirmed by the ANOVA estimates in Table 4.3, revealing a p-value of 0.053, just above the conventional 0.05 significance level.

Table 4.4 delves into the regression coefficients, shedding light on the individual contributions of GDP growth, exchange rates, interest rates, and unemployment rates to inflation. Notably, exchange rates emerged as a significant predictor (p = 0.109), suggesting that fluctuations in exchange rates have a meaningful impact on inflation. Conversely, interest rates and unemployment rates did not achieve statistical significance in predicting inflation, underlining the nuanced nature of these relationships.

Residual statistics in Table 4.5 indicated that the model’s predicted values are closely aligned with the observed inflation rates. This was further corroborated by the relatively low standard deviation of residuals, signifying a satisfactory level of precision in the model’s predictions.

Correlation estimates in Table 4.6 deepened our understanding of the relationships between macroeconomic variables. The negative correlation between GDP growth and inflation, although not statistically significant, suggested a trend where higher economic growth might be associated with lower inflation. The strong positive correlation between unemployment rates and inflation was both statistically significant and substantively meaningful, indicating that periods of higher unemployment are linked to elevated inflation. Exchange rates exhibited a robust positive correlation with inflation, signifying that currency fluctuations significantly influence inflation dynamics.

In summary, the findings from this comprehensive analysis present a nuanced narrative of Nigeria’s economic performance. The interdependence of macroeconomic variables underscores the multifaceted nature of economic dynamics. Exchange rates and unemployment rates emerged as pivotal factors influencing inflation, providing policymakers with valuable insights for crafting effective economic strategies.


In conclusion, the hypotheses tested provide meaningful insights into the dynamics of inflation in Nigeria. The results of the ANOVA analysis (Table 4.3) indicate that the regression model, incorporating GDP growth, unemployment rates, exchange rates, and interest rates as predictors of inflation, exhibits a marginal level of significance (p = 0.053). While the overall model significance suggests that the selected predictors collectively contribute to explaining variations in inflation, individual hypotheses focused on specific predictors merit careful consideration.

The first hypothesis, assessing the impact of interest rates on inflation, is not statistically supported, as the p-value exceeds the conventional significance level (p = 0.367). Similarly, the second hypothesis, exploring the relationship between exchange rates and inflation, lacks statistical significance (p = 0.109). However, the third hypothesis, about the influence of unemployment rates on inflation, demonstrates statistical significance (p = 0.025).

Therefore, the overarching conclusion is that, based on the evidence presented, the relationship between interest rates and inflation, as well as exchange rates and inflation, cannot be deemed statistically significant. Conversely, variations in unemployment rates have a meaningful influence on inflation in the Nigerian economic context. These findings offer valuable guidance for policymakers, emphasizing the need for nuanced strategies that consider the distinctive impact of unemployment rates on inflation dynamics.


The following recommendations were proposed for this study:

  1. Policy Considerations: Given the statistically significant influence of unemployment rates on inflation, policymakers should focus on employment-generating strategies to mitigate inflationary pressures. Implementing targeted policies that promote job creation and economic empowerment can contribute to a more stable economic environment.
  2. Interest Rate Management: While the study did not find a significant impact of interest rates on inflation, ongoing monitoring and adjustments to interest rate policies remain crucial. Policymakers should continue to assess the appropriateness of interest rate levels to ensure they align with broader economic goals and contribute to overall stability.
  3. Exchange Rate Policies: Although the study did not establish a significant relationship between exchange rates and inflation, policymakers should remain vigilant about currency fluctuations. Continuous monitoring and periodic evaluations of exchange rate policies can help address potential inflationary risks associated with currency dynamics.
  4. Data Refinement: To enhance the accuracy of future studies, efforts should be directed toward refining data sources and collection methods. Continuous improvements in data quality and reliability will contribute to more robust research outcomes and a better understanding of the complex relationship between macroeconomic variables.
  5. Longitudinal Analysis: Conducting longitudinal studies over extended periods could provide a more comprehensive understanding of the evolving dynamics between macroeconomic variables and inflation. This longitudinal approach can capture changes in economic conditions and the effectiveness of policy interventions over time.
  6. Cross-Validation Studies: Future research should consider cross-validation studies, employing diverse methodologies to corroborate findings. Employing multiple research approaches can enhance the robustness of results and provide a more holistic view of the intricate relationships between economic variables.
  7. Multifaceted Policy Frameworks: Policymakers should adopt multifaceted policy frameworks that acknowledge the interconnectedness of economic variables. This involves considering the simultaneous impact of interest rates, exchange rates, and unemployment rates on inflation when formulating and implementing economic policies.
  8. International Collaboration: Given the increasingly globalized nature of economies, collaboration with international institutions and neighbouring countries can provide valuable insights and contribute to the development of more effective policies. Sharing best practices and experiences can lead to better-informed decision-making at both national and regional levels.

Contribution to Knowledge

This study contributes significantly to the existing body of knowledge by shedding light on the intricate dynamics between key macroeconomic variables and inflation in Nigeria. The findings offer nuanced insights into the relationship between interest rates, exchange rates, unemployment rates, and inflation, providing a more comprehensive understanding of the factors influencing the country’s economic stability. The identification of unemployment rates as a significant factor impacting inflation underscores the need for targeted employment policies to alleviate inflationary pressures. This insight contributes to the broader discourse on the multifaceted nature of inflation determinants and informs policymakers on the importance of employment-focused strategies in achieving macroeconomic stability.

Moreover, the study’s examination of interest rates and exchange rates, even if not yielding statistically significant results, adds granularity to the ongoing debate on the effectiveness of monetary policy tools in controlling inflation. This nuanced perspective contributes to the refinement of economic theories and frameworks, fostering a more informed discussion on the appropriateness of different policy instruments in the Nigerian context. As the study spans a period from 2010 to 2022, it captures a dynamic period in Nigeria’s economic history, providing valuable insights into the impact of various policy measures and external factors on inflation trends.

The methodological approach employed in this study, utilizing a correlational research design and multiple regression analysis, contributes to the methodological toolkit in economic research. By using a robust statistical approach, the study enhances the rigour of the findings and sets a precedent for future research endeavours in similar contexts. The meticulous examination of the data’s descriptive statistics, model summary, ANOVA estimates, regression coefficients, residual statistics, and correlation estimates provides a comprehensive methodological framework for researchers and policymakers to assess and replicate similar studies in diverse economic settings.


  • Adefeso, H. A., & Mobolaji, M. I. (2020). The fiscal-monetary policy and economic growth in Nigeria: Further empirical evidence. Pakistan Journal of Social Sciences, 7(2), 137-142.
  • Adesoye, A. B., Maku, O. E., & Atanda, A. A. (2022). Is monetary policy a growth stimulant in Nigeria? A Vector Autoregressive Approach. Munich Personal RePEc Archive (MPRA). No. 35844, pp. 1-24.
  • Ahiabor, G. (2021). The effect of monetary policy on inflation in Ghana. IISTE Developing Countries series, 3(12).
  • Ajisafe, R. A., & Folorunso, B. A. (1999). The relative effectiveness of fiscal and monetary policies in macroeconomic management in Nigeria. The African Economic and Business Review, 3(1), 23-40.
  • Anderson, V., Fontinha, R., & Robson, F. (2020). Research Methods in Human Resource Management: Investigating a Business Issue (4th ed.). London: CIPD.
  • Assenmacher-Weche, K., & Gerlach, S. (2006). Money at low frequencies. Journal of European Economic Association, 5, 635-642.
  • Badreldin, M. A. (2022). Inflation and economic performance in Sudan: An Analysis Study. Researchjournali’s Journal of Economics, 2(3), 1-8.
  • Bassey, G. E., & Essien, E. B. (2020). Monetary credit, foreign trade and exchange rate policy guidelines for fiscal years 2014/2015. Journal of Economics and Sustainable Development, 5(12), 88-101.
WeCreativez WhatsApp Support
Our customer support team is here to answer your questions. Ask us anything!