Authors
Gbenga Daniel Oniyide
Department of Economics, Faculty of Social Sciences, University of Ilorin.
Abstract
Poverty remains a major development challenge in Nigeria despite various monetary policy interventions aimed at promoting macroeconomic stability and inclusive growth. While existing studies have largely focused on the direct effect of monetary policy on poverty reduction, limited attention has been paid to the role of institutional quality in shaping the effectiveness of monetary policy outcomes. This study therefore re-examines the monetary policy–poverty nexus in Nigeria by investigating whether institutional quality enhances the effectiveness of monetary policy in reducing poverty. The study utilised annual time-series data covering the period 1995–2025, thereby capturing both pre- and post-COVID-19 macroeconomic conditions. The Autoregressive Distributed Lag (ARDL) approach was employed to estimate both the short-run and long-run relationships among the variables. Institutional quality was measured using a composite index constructed from the six dimensions of the Worldwide Governance Indicators through Principal Component Analysis (PCA).
Keywords
Monetary Policy Monetary Policy Institutional Quality ARDL Financial Intermediation Nigeria
How to Cite This Article
APA Citation
Oniyide, G. D. Rethinking The Monetary Policy-Poverty Nexus in Nigeria: The Role of Institutional Quality.
Conclusion
This study examined the effect of monetary policy on poverty reduction in Nigeria and investigated the moderating role of institutional quality using annual data covering the period 1995–2025 within the ARDL framework. The findings reveal strong persistence in poverty dynamics in Nigeria, indicating that current poverty conditions are strongly influenced by past poverty levels, reflecting the structural nature of poverty in developing economies. The results further show that monetary policy exerts both short-run and long-run effects on poverty, although the direction and magnitude of these effects vary across transmission channels.Specifically, monetary policy tightening appears to reduce poverty in the short run but contributes to higher poverty levels in the long run, consistent with the monetary transmission mechanism through interest rates and credit condition. Broad money supply was found to have limited long-run influence on poverty, indicating that monetary expansion alone is insufficient to generate sustained welfare improvements. In contrast, credit to the private sector emerged as an important channel through which poverty can be reduced, highlighting the role of financial intermediation in promoting inclusive economic growth highlighting the role of financial intermediation in promoting inclusive economic growth. The findings also show that exchange-rate movements have important welfare implications through their effects on prices, production costs and household purchasing power. The results also indicate that major economic disruptions, including the COVID-19 pandemic, altered poverty dynamics during the study period. The study further examined whether institutional quality influences the effectiveness of monetary policy in reducing poverty. While the direct effect of institutional quality on poverty is not consistently significant across all specifications, the interaction results suggest that stronger institutions can enhance the effectiveness of monetary policy by mitigating some of the adverse welfare effects associated with monetary tightening and exchange-rate fluctuations through which policy actions are transmitted. This finding indicates that the poverty implications of monetary policy depend not only on the policy instruments employed but also on the institutional environment through which policy actions are transmitted. Unlike previous Nigerian studies that primarily examined the direct effects of monetary policy and institutional quality on poverty, this study demonstrates that institutional quality also serves as a conditioning mechanism through which the welfare effects of monetary policy are transmitted. The findings therefore suggest that monetary policy should be implemented alongside measures aimed at strengthening governance quality, regulatory effectiveness and institutional accountability. Such reforms may strengthen the channels through which monetary policy affects economic activity and household welfare. The results also underscore the importance of policies that promote financial sector development, expand access to productive credit and support employment creation, given the significant role of financial intermediation and labour market conditions in influencing poverty outcomes.
The study concludes that monetary policy remains an important instrument for influencing poverty outcomes in Nigeria, but its effectiveness depends largely on the institutional environment within which it operates. The findings suggest that stronger institutions can enhance monetary policy effectiveness and reduce some of the welfare costs associated with monetary tightening and exchange-rate adjustments. Sustainable poverty reduction therefore requires monetary policies that support macroeconomic stability, institutions capable of improving policy transmission, measures that expand access to productive credit and employment opportunities. Put differently, the issue is no longer whether monetary policy affects poverty in Nigeria, but whether the institutional environment is sufficiently effective to allow monetary policy to translate into meaningful and sustained improvements in household welfare. Future studies may extend the analysis by examining alternative dimensions of institutional quality, disaggregated measures of poverty and other monetary transmission channels. They may also explore regime-switching or structural-break models to account for possible changes in the monetary policy–poverty relationship over time.
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