Monetary Policy and Income Inequality in Nigeria

Abstract

This research explores how monetary policy impacts income inequality in Nigeria from 1994 to 2024. It stems from the sparse and often contradictory literature surrounding this crucial issue in the Nigerian context. Using the Autoregressive Distributed Lag (ARDL) bounds testing method for cointegration, the study examines the connection between income inequality-represented by the Gini coefficient-and several key factors such as the monetary policy rate, money supply, inflation, exchange rate, GDP growth, and unemployment. The findings reveal a stable long-term relationship among these variables. Notably, the study shows that monetary policy plays a significant role in reducing income inequality in Nigeria. Specifically, the monetary policy rate (MPR) has a meaningful negative effect,. suggesting that tighter monetary policies can lead to greater income equality. On the flip side, inflation and a depreciating exchange rate tend to worsen inequality. The Error Correction Model indicates a quick adjustment process in the short run, and all diagnostic tests affirm the model's robustness. In conclusion, this study highlights that monetary policy can effectively influence income distribution in Nigeria. A critical takeaway  is that the Central Bank of Nigeria should explicitly include reducing inequality as part of its policy objectives, ensuring that monetary strategies are designed to promote more inclusive economic growth.