AN INTERACTION BETWEEN MONETARY POLICY, COMMODITY PRICES AND INFLATION IN NIGERIA, 1980-2015

Abstract

This study evaluates the interaction between monetary policy, commodity prices and inflation in Nigeria using an unrestricted Vector Auto Regression (VAR) model and Cointegration test approaches from1980 to 2015. The study utilizes data on monetary policy rate (MPR), commodity product export (CPE), rate of inflation (INF), industrial production (INDP) and oil price (OILP) for analysis. The descriptive statistics result for the variables under consideration indicates that all the variables have positive mean values with 36 observations. The Unit root test result indicates that all the variables are stationary and are integrated of order one at 5% level of significance. The cointegration test result indicates at most two cointegrating equations. The impulse response function results indicates that the response of the INF to one standard innovation is positive to its own shock in the short run, it fluctuates and became stable with positive trend along the horizon in the long run. The response of the INF to one standard innovation in the CPE indicates a lower response of negative shock in the initial period with fluctuation, then stabilizes in the long run. The response of the INF to one standard innovation in MPR shows a fluctuation in the short run, but steadily continues its positive trend along the horizon in the long run period. The response of INF to one standard innovation in OILP indicates a negative response in both short and long periods. The variance decomposition result shows that the shock of the INF to itself indicates that it accounts for the most of the variability over all periods, it ranges from 92% in the short run to 55% in the long run. The shock of INF to CPE shows a decreasing pattern from the first quarter, ranging from 0.1 % in the short run to 6.5 % in the tenth period. The shock of the INF to MPR indicates a decreasing pattern in the short run from 2.4%, it increases to 24.35% in the medium run and continues increasing to 32% in the long run. The study therefore recommends that the Federal Government’s attention should be focused on non-oil agricultural commodities for future and stable economic growth in Nigeria.