INFLATION, INTEREST RATE AND EXCHANGE RATE IN NIGERIA: AN EXAMINATION OF THE LINKAGES AND IMPLICATIONS FOR MONETARY POLICY

ABSTRACT: This study examined the linkages among inflation, interest rate and exchange rate along withmoney supply and GDP with the aim of showing how the interactions among variables should influencemonetary policy decisions in Nigeria using quarterly data from 2010 to 2018. The relationship among variableswas captured in a Vector Autoregressive (VAR) model. Co integration test was used to examine the long runrelationship among variables and consequently the estimates of a Vector Error Correction (VEC) model wasused to examine the short run relationship among variables. In our findingsexchange rate is indicated as themost important monetary policy variable because it has a significant link with all variables in the model. Thefindings show that price stability and economic growth could be achieve through effective exchange rate andinterest rate policies. It is recommended that the monetary authority should continue to intervene in the foreignexchange market to stabilize exchange rate because as shown in this study, exchange rate in Nigeria hassignificant links with inflation, interest rate, money supply and GDP; and increase in money supply to boostdomestic production by givinglow cost credit to firms that make use of more domestic inputs in production toensure that the increase in money supply does not lead to increase in import.