Effect of Monetary Policy Instruments on Nigeria's Real GDP Stability: Evidence from an ARDL Approach (1981–2023)

Abstract

This study investigates the impact of monetary policy instruments on Nigeria's real GDP stability from 1981 to 2023. Using data from the Central Bank of Nigeria (CBN) and the World Bank, key monetary policy tools such as the monetary policy rate (MPR), money supply (M2), liquidity ratio (LQR), Treasury bill rate (TBR), and open market operations (OMO) are analyzed to determine their effects on real GDP stability. The study employs the Autoregressive Distributed Lag (ARDL) model, the Error Correction Model (ECM), and Variance Decomposition Analysis (VDA) to examine short- and long-term relationships. The findings reveal that monetary policy significantly influences real GDP stability in Nigeria. Adjustments to the money supply and monetary policy rate are shown to have the most substantial long-term effects, while open market operations exhibit notable short-term impacts. Conversely, the liquidity ratio and Treasury bill rate demonstrate minimal influence. The study concludes that effective monetary policy decisions are vital for stabilizing Nigeria's economy, particularly through targeted adjustments to the money supply and interest rates. Based on the results, the study recommends sector-specific monetary policies, enhanced data-driven analyses, and targeted financing schemes for high-growth sectors to foster sustained economic growth and stability.