Monetary Policy and Income Inequality in A Vector Error Correction Model in Nigeria (1999-2025)

This study examines the dynamic relationships between income inequality, measured by the Gini coefficient (GINI), and key macroeconomic variables of monetary policy captured by money supply (M2), interest rate (INT), inflation (INF), and exchange rate (EXR) for the period 1999–2025. Using a Vector Error Correction Model (VECM), a long-run cointegrating relationship among the variables was established. The VECM results reveal that while money supply contributes to a reduction in income inequality in the long run, increases in interest rates, inflation, and the exchange rate are significant drivers of rising inequality. The model's short-run dynamics, however, were found to be insignificant, suggesting that temporary fluctuations do not have an immediate impact on income inequality. Diagnostic tests confirm the robustness of the model, showing that the residuals are free from autocorrelation, heteroskedasticity, and are normally distributed. Impulse response and variance decomposition analyses further support these findings, highlighting the persistent and dominant role of inflation and the exchange rate in explaining the long-term forecast error variance of the Gini coefficient (income inequality). These results have crucial policy implications, suggesting that macroeconomic stability, particularly in managing inflation and the exchange rate, is vital for long-term income equality