Inflation, Monetary Policy Rate and Economic Growth Nexus in Nigeria

Abstract

This paper unravels inflation rate, monetary policy rate and growth nexus in Nigeria using time series data spanning from 1981 to 2022. Specifically, it examined the inflation rate impacted economic growth in Nigeria and investigated whether the interest rate had any significant impact on economic growth in Nigeria. The paper adopted a secondary method of data collection and employed the Johansen co-integration test and the error correction model, which showed that the underlying variables were integrated of order 1(1), that is, stationary after first difference, with the growth rate of the real gross domestic product as the dependent variable and the inflation rate and interest rate as the independent variables. The exchange rate and broad money supply were used as the control variables. The paper documents that the error correction model (ECM) estimation indicated that both the inflation rate and interest rate exhibit a negative and statistically significant impact on gross domestic product (GDP) at the 5% significance level. Additionally, the analysis demonstrated that a broad money supply positively and significantly influences GDP, also at the 5% significance level, while the exchange rate does not have a significant effect on GDP. The paper therefore recommended, among other things, that, given the adverse effect of inflation on economic growth, it is imperative for policymakers to implement measures aimed at controlling inflationary pressures. This may include adopting tighter monetary policies, such as increasing interest rates or adjusting government spending, to curb inflationary tendencies and stabilize prices.