MONETARY POLICY RATE, INFLATION AND ECONOMIC GROWTH IN NIGERIA

Dr. David Terkura Bakkihs
Volume 2 Issue 2

Abstract

The study used Taylor’s rule and examined the relationship between the MPR, Inflation and economic growth in Nigeria spanning from 2007Q1 – 2017Q4 and employed the Structural VAR model technique. These structural parameters have shown that there is a positive statistically significant relationship between monetary policy rate and inflation in Nigeria in the short-run given the period of this study. Thus, monetary policy rate outcomes in Nigeria are ineffective in curtailing inflationary pressures. The estimated structural parameters also reveal a positive statistically significant relationship between monetary policy rate, interest rate and exchange rate in Nigeria in the short-run given the period of this study. It is also evident that estimated structural parameters are negative and significant relationship between interest rate and real Gross Domestic product (GDP) growth. Thus, the interest rate and credit channels are active in the monetary policy transmission in Nigeria. Finally, the impulse response results have indicated that increasing monetary policy rate (MPR) increases inflation, interest rate and depreciates the naira with negative consequences on the real Gross Domestic Product (GDP) output in the country. That is, inflationary pressures in the country via the exchange rate pass-through to domestic prices occasioned by changes in MPR exert negative impact on the real GDP growth on one hand, and the interest rate and credit channels are active in the monetary policy transmission in Nigeria. The interest rate and credit channels limit productive investments with spillover effects on real GDP growth and employment. The study recommends that the Monetary Policy Committee (MPC) should reduce the rate since the effect of monetary policy Rate transmission will affect the real sector of the economy positively through the Interest rate and credit channels. Keywords: Inflation, Economic Growth, MPR, Interest Rate

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