Monetary Policy and Inflation Dynamics in Nigeria: A Bayesian DSGE Approach

This study examines monetary policy shock and inflation dynamics in Nigeria within an open economy Bayesian DSGE model framework, employing data from 2000Q1 to 2023Q1. It applies different price measures across the pre-COVID/Russia-Ukraine war era and the entire sample. Findings reveal a significant impact of monetary policy shock on inflation, irrespective of the price measure adopted. Remarkably, the results also reveal a marginal decline in the potency of monetary policy in the COVID/Russisa-Ukraine War era, compared to the pre- COVID/Russisa-Ukraine War era. The study recommends the adoption of GDP deflator as the measure of inflation that anchors inflation expectations as it is most responsive to monetary policy innovations. It also recommends complementing monetary policy with supply-side policies when faced with inflationary pressures occasioned by supply chain disruptions.