Impact of Inflation on Monetary Policy and Economic Development in Nigerian, 1980-2010. Evidence from Empirical Data

The study explores the efficacy in the effective operation of monetary policy in Nigeria with emphasis in inflation. A number of monetary variables which include domestic credit, interest rate, exchange rate and broad money supply were employed for the study. Additionally, fiscal deficit and trade openness were included as a function of inflation in Nigeria. Again, to assess the impact of inflation on the country‟s growth rate, domestic credit and money supply were added to inflation as determinants of economic growth. A simple linear regression was adopted for the study and results reveal that domestic credit, fiscal deficit and a one year lag of inflation are statistically significant in explaining inflation in Nigeria. On the relationship between inflation and the explanatory variables: fiscal deficit, money supply and interest rate have a positive correlation with inflation while exchange rate, trade openness and past level of inflation have a negative impact on inflation. The findings also reveal that impact of inflation on economic growth is negative while that of money supply and domestic credit is positive. The study recommends, among other things, that since impact of inflation on economic growth is negative, policy measures aimed at curtailing such impact should include targeting of less than double digit inflation through effective monetary policy and increase in output and productivity through effective agriculture and full capacity utilization in manufacturing sector.