Monetary Policy, Central Bank Independence and Inflation Control in Nigeria

Abstract

This study investigated the dynamic relationships determining inflation control in Nigeria, focusing on the interactions between monetary instruments, central bank autonomy, and fiscal policy. Utilizing annual time-series data spanning 1981 to 2023, the study employs the Autoregressive Distributed Lag (ARDL) bounds testing technique to evaluate short-run and long-run macroeconomic dynamics. The ARDL estimations reveal that the contemporaneous monetary policy rate has an insignificant short-run effect, while its one-year lag significantly reduces inflation, confirming policy transmission frictions. Broad money supply (M2) growth exerts a highly significant positive impact on inflation across both horizons, strongly validating the monetarist hypothesis. Regarding institutional design, central bank independence (CBI) and its one-year lag significantly lower short-run inflation by anchoring credibility; however, this effect becomes positive and insignificant in the long run, illustrating the operational limits of legal autonomy under persistent fiscal dominance. Finally, fiscal deficits exhibit a dual short-run effect – contemporaneous deficits reduce inflation while lagged deficits increase it – but exert a significant negative impact on long-run price levels. This long-run negative relationship supports the productive capital expenditure hypothesis, suggesting that deficit financing cools structural cost-push inflation when channelled into expanding supply capacity. Consequently, the study recommends establishing an institutionalized Fiscal-Monetary Coordination Council, enforcing strict caps on central bank credit to the government, transitioning toward an explicit inflation-targeting framework, and legally restricting deficit financing to high-yield infrastructure.