Vector Autoregressive Model and Autoregressive Distributed Lag in the Effectiveness of Monetary Policy in Controlling Inflation in Nigeria

Abstract

The research investigated the effectiveness of vector autoregressive model and autoregressive distributed lag in controlling inflation using monetary policy in Nigeria. Secondary quarterly data spanning from 1999Q1 to 2023Q4 with Money Supply, Treasury bills rate, monetary policy rate and exchange rate were adopted as control variables to investigate their relationship with inflation and to assess the dynamic Correlations among instruments used in monetary policy inflation in the Nigeria economy. Long run relationship between the variables were established by co-integration test, stationarity was achieved after first differencing, Ordinary Least Square (OLS) was use to estimate the parameter of the model. The research discovered that exchange rate and money supply has a unidirectional causality with inflation and inflation has a uni-directional relationship with monetary policy rate while exchange rate has a bi-directional relationship with money supply. While the empirical result of vector autoregressive and autoregressive distributed the empirical findings suggest that the monetary policy rate, money supply, and Treasury bill rates have a statistically significant positive effect on inflation in Nigeria. Moreover, exchange rate depreciation is associated with an acceleration in inflationary pressures.. But ARDL give the best result base on the model performance from the analysis using akaike information criterion (AIC). INF AIC = 4.500590, EXG AIC = 8.363651, M2 AIC = 16.8217 which are less than that of VECM. The findings align with the expectations of economic theory. Consequently, the study concludes that money supply, treasury bill rates, monetary policy, and exchange rates significantly influenced inflation during the period examined. Based on this, the study offers the following recommendations: Gradual increases in MPR can reduce demand-pull inflation without causing undue economic disruption and Implement To control the money supply and curb inflationary pressures, the monetary authorities should strengthen the use of open market operations and reserve requirements. Additionally, there is a need to conduct a fresh analysis of the monetary policy rate’s effectiveness, as it proved inadequate in managing Inflation dynamics in Nigeria throughout the examined timeframe. Keywords: Autoregressive, correlation, inflation, monetary, policy