Exchange Rate Regimes and Monetary Policy Independence in Nigeria

By: Ayibatunimibofa Franklin Agada

Pages: 98–116, Volume: 3, Number: 2

Published by: AEFUNAI Journal of Economics, Finance and Development Studies, Alex Ekwueme Federal University, Ndufu-Alike, 8/1/2026, 2026

ISSN (Electronic): 2536-6742

DOI:

Exchange Rate Regimes and Monetary Policy Independence in Nigeria

Abstract:

The study examined the relationship between exchange rate regimes and monetary policy independence in Nigeria in the context of the policy trilemma. The main objectives of this paper are to assess the effects of monetary policy independence under fixed versus flexible exchange rate regimes, exchange rate volatility, the real classification of the exchange rate regime, inflation, and capital mobility. The study employed a quantitative ex post facto design, drawing on annual data from 1980 to 2025 sourced from the Central Bank of Nigeria, the IMF, and the World Bank. The paper employed the ARDL model, the Bounds cointegration test, and the ECM to examine the short- and long-run relationships. In contrast, GARCH, Granger causality, and stability tests were used to assess robustness. The results indicate that the exchange rate regime has a significant and positive effect on monetary policy autonomy in the short and long run. Autonomy fell with inflation and increased with capital mobility. On the other hand, exchange rate volatility and the real classification of the exchange rate were statistically insignificant. The Bounds test confirmed that there is a stable long-term relationship among the variables, and the ECM showed a rapid adjustment towards equilibrium. The study suggests that Nigeria’s monetary policy autonomy largely depends on exchange rate regime choices and macroeconomic stability, rather than short-term volatility or classification labels. It recommends a more flexible exchange rate regime, improved inflation-targeting strategies, and enhanced capital flow management to increase the effectiveness of monetary policy and economic stability.

Keywords: Exchange rate regime, monetary policy autonomy, ARDL, Nigeria, policy trilemma