MONETARY POLICY RESPONSE TO INFLATION TARGETING IN NIGERIA: EVIDENCE FROM A NONLINEAR AUTOREGRESSIVE DISTRIBUTED LAG APPROACH

Abstract

This study investigates the monetary policy response to inflation targeting in Nigeria over the period 1986 to 2023, using annual data from the World Bank World Development Indicators, the Central Bank of Nigeria (CBN) Statistical Bulletin, and the IMF Fiscal Monitor. Nigeria operates an implicit inflation targeting framework, yet inflation has remained persistently high, raising important questions about the effectiveness of monetary policy transmission. Anchored on the New Keynesian macroeconomic framework and the Quantity Theory of Money, this study employs the Nonlinear Autoregressive Distributed Lag (NARDL) model to examine the asymmetric short-run and long-run effects of monetary policy rate adjustments on inflation. A Vector Autoregression (VAR) model with impulse response functions and forecast error variance decomposition is also applied to trace shock dynamics, while the Granger causality test determines the direction of causal influence. Findings reveal that monetary policy tightening exerts a stronger disinflationary effect than monetary easing exerts an inflationary effect in the long run, confirming significant asymmetry. Fiscal dominance, exchange rate pass-through, and broad money supply are identified as significant co-drivers of inflation. The error correction term is negative and significant, indicating a moderate speed of adjustment to long-run equilibrium. The findings have important implications for the design of credible inflation targeting frameworks and monetary-fiscal coordination in Nigeria.