Monetary Policy And Price Stability In Nigeria (december 2006 Through February 2012

AbstractThis research work evaluates the responses of inflation, interest and exchange rate to shocksin Monetary Policy (captured by MPR) as well as the impacts of MPR on theseMacroeconomic Variables. The study used monthly data spanning from December, 2006(when the MPR was introduced) through February, 2012. Following Joao and Andrea(2006), the research used Structural VAR to estimate the model. The result shows thatinflation responds to shocks in MPR only in a fairly unstable manner (a pattern that is almostunpredictable); in the first four periods, positive shocks in MPR could not bring downinflation but thereafter, any further increase in MPR produced gradually declining butpositive rate of interest. On the other hand, exchange rate responds to shocks in MPR in arelatively downward fashion and quickly assumes upward trend from the second periodlasting throughout the period, while interest rate, responds quickly and positively to shocks inMPR from the first thorough the last period.Therefore, interest and exchange rates are more responsive to shocks in MPR than inflationand above all sometimes changes in MPR cannot guarantee the expected changes in Inflation(because of large informal sector as well as policy divergence between the monetary andfiscal authorities among other reasons). Hence, of all the three variables, inflation is the mostdifficult to deal with and stability of which is a necessary condition for the achievement ofstability in the other two variables (interest & exchange rates). More so, interest andexchange rates as well as MPC meetings are better predictors of MPR (because of their highsensitivity to it) than the rate of inflation. The result also uncovered that as the most difficultenemy of the economy, inflation cannot be effectively and efficiently conquered with thevariation in MPR alone, other instruments particularly Cash Reserve Requirement (CRR)and especially Open Market Operations (OMO) should be prudently used to compliment theefficacy of MPR. Consequently, the paper further recommends the current monetarytightening stance of CBN but should be used with caution, improvement and expansion of thecash-lite policy and non-interest banking of the CBN, infrastructural development,harmonization of fiscal and monetary policy as well as the reduction in the number of MPCmeetings to at most quarterly unless in case of emergency.viii | P a g eTABLE OF CONTENT

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