Benue State University, Makurdi

Monetary Policy Rate and Performance of the Nigerian Economy: A Simulation Analysis

Hannah Ehi Onuh and Terwuah Simeon Asom

Abstract

This study investigated the impact of monetary policy rate on the performance of the Nigerian economy by focusing on the macroeconomic variables of aggregate demand, total output production and inflation. The study used quarterly data on the Nigerian economy from 2006Q4 to 2022Q4. The study simulated the impact of 5% increase and 5% decrease in the monetary policy rate on aggregate demand, total output production and inflation. The study revealed that increasing the monetary policy rate was ineffective in controlling inflation in Nigeria. An increase in the monetary policy rate caused an increase in the interest rate, which in turn affected the supply of credit to the private sector. A reduction in the credit supply to the private sector has adverse consequences for aggregate demand and total output production in the economy. Also, the study concludes that decreasing the monetary policy rate in the country has the propensity to increase the credit supply to the private sector, with a potential positive impact on aggregate demand and total output production and, consequently, GDP growth in the economy. Therefore, the Central Bank of Nigeria (CBN) should consider the option of lowering the monetary policy rate (MPR) to stimulate economic and output growth. This would reduce interest rates, especially lending rates, and consequently increase the credit supply to the private sector in the economy. It is also recommended that the CBN continue to employ the monetary policy rate to effect changes in the credit supply and its accessibility to the private real economy.

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