Mediating Role of Industrial Output on the relationship between Monetary Policy and Inflation in Nigeria

Abstract

obtained from CBN statistical bulletin from 1990Q1 to 2019Q4.  Monetary policy was proxied by monetary policy rate (MPR), prime lending rate (PLR), maximum lending rate (MLR), and treasury bills rate (TBR). The study employed Structural Equation Modelling (SEM) in analysis. It was found that monetary policy rate, prime lending rate, maximum lending rate, and treasury bills rate impacted positively on inflation in Nigeria. It was also found that industrial output impacted negatively on inflation, implying that an increase in industrial output will lead to a reduction in inflation in Nigeria. The study also found that industrial output played a partial mediation on the relationship between prime lending rate (PLR), maximum lending rate (MLR), and inflation but a complete mediation was found for industrial output on the relationship between monetary policy rates (MPR), treasury bills rate (TBR) and inflation in Nigeria. The study concluded that when industrial output is used as a mediator variable, on the relationship between monetary policy and inflation; monetary policy can effectively reduce inflation indirectly by boosting industrial output or production. The study recommends that to achieve the monetary policy objective of price stability, the monetary authority should reduce MPR, PLR, MLR, and TBR to boost industrial output, as industrial output has the potential of reducing the inflation rate in Nigeria.