Monetary Policy Instability in Nigeria: A Rational Expectation Approach

This paper aims at evaluating the efficacy of monetary policy in controlling macroeconomic instability in Nigeria. The analysis performed is based on a rational expectation framework that incorporates the fiscal role of exchange rate. Using annual data spanning from 1980 to 2010, the study affirms that the effort of monetary policy in Nigeria aimed at influencing the finance of government fiscal deficit through the determination of the inflation-tax rate affects both the rate of inflation and the real exchange rate, thereby causing volatility in these rates. The policy import of the paper is that monetary policy should be set in such a way that the objective it seeks to achieve is well defined and articulated.