Institutional Quality and the Financial Development-Inflation Nexus in Nigeria
DOI:
https://doi.org/10.54536/ajebi.v5i2.7423Keywords:
Corruption, Financial Development, FMOLS, Inflation, Institutional Quality, Price Stability, Trade OpennessAbstract
This study examines the effect of financial development and institutional quality on inflation in Nigeria over the period 1984 to 2022. The analysis used secondary annual data sourced from the World Development Indicators and the International Country Risk Guide. Using the Fully Modified Ordinary Least Squares (FMOLS) technique, the study examines both the individual and interactive effects of financial development and institutional quality on inflation dynamics. The empirical results reveal that broad money supply and institutional quality do not individually exert a significant influence on inflation in Nigeria. However, trade openness and the interaction between corruption and the money supply are found to have positive and statistically significant effects on inflation. These findings suggest that monetary expansion becomes inflationary in the presence of weak institutional governance, particularly corruption. Based on the results, the study recommends strengthening anti-corruption mechanisms, reducing import dependency, and adopting exchange rate policies that limit the pass-through of external shocks in order to enhance price stability in Nigeria.
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