The Role of Interest Rates and Liquidity Ratios in Controlling Inflation in Nigeria

Abstract

This study examined the role interest rates and liquidity ratios plays in controlling inflation in Nigeria. The study adopted interest rate, minimum rediscount rate, liquidity ratio, and cash reserve ratio as the independent variables. These were regressed against inflation rate, the dependent variable. Secondary time series panel data for the period covering 1982 to 2011, were collected from the Central Bank of Nigeria (CBN) Statistical Bulletin in 2011. The study employed multiple regression technique based on E-views 7 computer software to analyze data obtained on the study variables. Four hypotheses were tested and the null hypotheses were accepted based on the regression results. The study found that interest rate, minimum rediscount rate, liquidity ratio and cash reserve ratio had no significant influence on inflation. The study recommended that Nigeria should shift from being a consumption-driven economy to a production-based economy.

Keywords: Monetary policy, Inflation, Minimum rediscount rate, Cash reserve ratio, Liquidity Ratio.