This study examined the relationship between capital inflows and monetary policy in Nigeria using data from 1985 to 2020. Employing the Vector Autoregression (VAR) analysis and the granger causality test, the study examined the causal relationship between capital inflow measured as foreign direct investment (FDI) and the nominal interest rate. Other control variables include the real gross domestic products (GDP), domestic savings and unemployment. The results showed evidence of a causal relationship between the nominal interest rate and foreign direct investment. A unidirectional causality was found running from FDI to nominal interest rate. There was a joint significant causality from all the variables to foreign direct investment. There was a unidirectional causality running from FDI to domestic savings. Employing a variance decomposition analysis and an impulse response function, the result showed that innovations in FDI caused changes in the nominal interest rate and vice versa. Policy strategies towards increasing foreign direct investment should include low nominal interest rate. 

Key words: Capital Inflows, Monetary Policy, VAR Model, Foreign Direct Investment