IMPACT OF MONETARY AND FISCAL POLICIES ON INFLATION IN NIGERIA

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PROJECT TOPIC AND MATERIAL ON IMPACT OF MONETARY AND FISCAL POLICIES ON INFLATION IN NIGERIA

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  • Name:IMPACT OF MONETARY AND FISCAL POLICIES ON INFLATION IN NIGERIA
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ABSTRACT

The relative impact of fiscal and monetary policies on inflation control has generated heated debate among economic researchers. In an attempt to resolve this issue, empirical studies continue to offer conflicting results. Against this background, this study examines the impact of monetary and fiscal policies on inflation control in Nigeria during the period 1986-2016. The study employed the Ordinary Least Squares (OLS) on a different stationary time series to estimate inflation rate as a function of money supply and fiscal balance. The results show that monetary policy has more significant impact on inflation control than the fiscal policy in Nigeria. The results further revealed that when taken together, monetary and fiscal policies have significant impact on inflation control. The study therefore recommends among other things that the government should ensure there is appropriate mix of monetary and fiscal policies when the objective is to control inflation in Nigeria

TABLE OF CONTENTS

Title Page                                                                                                                    i

Certification Page                                                                                                       ii

Approval Page                                                                                                                        iii

Dedication                                                                                                                  iv

Acknowledgements                                                                                                    v

Table of Contents                                                                                                       vi

Abstract                                                                                                                      viii

 

CHAPTER ONE: INTRODUCTION

  • Background to the study 1
  • Statement of the Problem                                     3
  • Research Questions 5
  • Objective of the Study 6
  • Research Hypotheses 6
  • Scope and limitations of the Study 7
  • Significance of the Study 7
  • Organization of the Study 8

 

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1 Theoretical Literature Review                                                                              9

2.1.1 Conceptual Issues                                                                                              9

2.1.2 Basic Theories of Inflation                                                                                10

2.1.3 Other Related Theoretical Issues                                                                       19

2.2 Empirical Literature Review                                                                                 30

2.3 Summary of Literature Reviewed                                                                                    33

2.4 Justification for the Study                                                                                                34

 

CHAPTER THREE: RESEARCH METHOD    

3.1 Theoretical Framework                                                                                         35

3.2 Model Specification                                                                                              35

3.2.1 A Prior Specification                                                                                        36

3.3 Description of Variables/Measurement                                                                 37

3.4 Estimation Technique and Procedure                                                                   37

3.5 Evaluation of Procedure                                                                                       39

3.6 Nature and Sources of Data                                                                                 40

 

 

CHAPTER FOUR: RESULT PRESENTATION, ANALYSES AND DISCUSSION OF FINDINGS

4.1 Result Presentation and Analysis                                                                                     41

4.2 Evaluation of Estimates                                                                                        42

4.2.1 Evaluation Based on Economic Criterion                                                          42

4.2.2 Evaluation Based on Statistical Criterion (First-Order Test)                             43

4.2.3 Evaluation Based on Econometric Criterion (Second-Order Test)                   44

4.3 Evaluation of Hypothesis                                                                                                 44

4.4 Discussion of Findings                                                                                         45

 

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings                                                                                           46

5.2 Conclusion                                                                                                            47

5.3 Recommendations                                                                                                            48

5.4 Suggestion for Further Studies                                                                             48

References                                                                                                                  50

Appendix                                                                                                                    52

 

CHAPTER ONE

1.1 Background to the Study

One of the principal objectives of macroeconomic management is price stability.The primary goal of both fiscal and monetary policies is to maintain stable prices or low and stable inflation. Inflation is said to occur when there is a persistent and rapid increase in the general price level over a period of time. Inflation causes uncertainty about the future prices while affecting decision on savings and investment leading to mis allocation of resources. It also causes substantial redistribution of income and wealth from lenders to borrowers. Also, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time (Mankiw, 2002).

Inflation affects an economy in various ways, both positively and negatively. Negative effects of inflation include increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring that central banks can adjust real interest rates (to mitigate recessions) while encouraging investment in non-monetary capital projects (Mankiw, 2002).As a result, monetary and fiscal policies have both been commonly accorded prominent roles in the pursuit of macroeconomic stabilization in developing countries.

Monetary policy is concerned with discretionary control of money supply by the monetary authorities (Central Bank with Central Government) in order to achieve stated or desired economic goals. Governments try to control the money supply because most governments believe that its rate of growth has an effect on the rate of inflation. Hence monetary policy comprises those government actions designed to influence the behaviour of the monetary sector.  Thus, Monetary Policy is the deliberate use of monetary instruments (direct and indirect) at the disposal of monetary authorities such as central bank in order to achieve macroeconomic stability. Monetary policy is essentially a programme of action undertaken by the monetary authorities generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals (Dwivedi, 2005).

On the other hand, the term fiscal policy has conventionally been associated with the use of taxation and public expenditure to influence the level of economic activities. The implementation of fiscal policy is essentially routed through government’s budget. The budget is, therefore, more than a plan for administering the government sector. It (budget) both reflects and shapes a country’s economic life. In fact, the most important aspect of a public budget is its use as a tool in the management of a nation’s economy (Omitogun and Ayinla, 2007). Fiscal policy deals with government deliberate actions in spending money and levying taxes with a view to influencing macro-economic variables in a desired direction. This includes sustainable economic growth, high employment creation and low inflation. Increases in government spending or a reduction in taxes tend to pull the economy out of a recession; while reduced spending or increased taxes slow down a boom (Dornbusch and Fischer, 1990). Fiscal policy involves the use of government spending, taxation and borrowing to influence the pattern of economic activities and also the level and growth of aggregate demand, output and employment. Fiscal policy entails government’s management of the economy through the manipulation of its income and spending power to achieve certain desired macroeconomic objectives (goals) amongst which is economic growth (MedeeandNembee, 2011).

Fiscal and monetary policies are inextricably linked in macro-economic management as developments in one sector directly affect developments in the other.It is instructive to state here that the relative importance of these policies as tools for economic stabilization has been the subject of serious debate among different school of thoughts such as the Keynesians and the monetarists. The monetarists believe that monetary policy exert greater impact on economic activity while the Keynesian believe that fiscal policy rather than the monetary policy exert greater influence on economic activity.

The Nigerian economy has been plagued by several challenges over the years stemming from persistent macroeconomic instability. In spite of many, and frequently changing, fiscal, monetary and other macro-economic policies, Nigeria has not been able to maintain stability of economic activities over the past two decades (Ogbole, 2010). This is because fiscal policy in Nigeria has been heavily influenced by oil driven volatility impacting both revenue and expenditure. Since 1970, both revenue and expenditure have been very volatile while increasing at the same time. Despite their demonstrated efficacy in other economies as policies that exert influence on economic activities, both monetary and fiscal policies have not been sufficiently or adequately used in Nigeria (Ajisafe and Folorunsho, 2002).

While there are several studies on the debates between Keynesian and Monetarists in the developed countries, only fragmented evidence have been provided on this issues in the case of developing countries like Nigeria (Adefeso and Mobolaji, 2011). According to Adeoye (2006), the debate on the impact of fiscal and monetary policies as tools for economic stabilisation remains inconclusive given the conflicting results of previous studies.

1.2 Statement of the Problem

A problem connotes a situation that appears to warrant additional investigation, the examination and identification of alternative ways of handling a given situation are examples of problems (Anyanwu, 2000). Inflation has become one of the major macroeconomic problems facing most developing countries of the world like Nigeria. Consequently, the Nigerian government has over the years introduced various measures aimed at controlling inflation. Prominent among these measures are monetary and fiscal policies.

Fiscal and monetary policies are the tools through which an economy is regulated by the government or the respective Central Bank. While fiscal policy is the use of taxation and expenditure by the government to directly control the economy, the monetary policy is the use of changes in the stock of money by the monetary authorities (CBN in Nigeria) to control the economy. The objectives ofmonetary and fiscal policies in Nigeria are wide-ranging. These include increase in Gross Domestic Product (GDP) growth rate, reduction in the rates of inflation and unemployment, improvement in the balance of payments, accumulation of financial savings and external reserves as well as stability in Naira exchange rate (CBN, 2009). Generally, both fiscal and monetary policies aim at achieving relative macroeconomic stability. It is instructive to point out here that Nigeria having been affected by economic instability has experimented with a mixture of both fiscal and monetary policies as a tool for economic stabilisation.As noted by Ajisafe and Folorunso(2002), the monetary rather than fiscal policy exerts a great impact on economic activity in Nigeria and that the emphasis on fiscal action of the government has led to greater distortion in the economy

Over the last decade, the economic stability power of fiscal and monetary policies has generated heated debates among economic researchers across the globe as large volume of both theoretical and empirical literature continue to produce conflicting results. This bulk of theoretical and empirical research has not reached a conclusion concerning the relative impact of fiscal and monetary policy on inflation control. Some researchers find support for the monetarist view, which suggests that monetary policy generally has a greater impact on economic activities and dominates fiscal policy in terms of its impact on investment and growth (Chaudhary and Ahmad, 1995;Olorunfemi and Adeleke, 2013; and Nwachukwu, Dibie, and Ogudo, 2014), while others argue that fiscal policy stimulants are crucial for economic stabilisation and growth (Kilindo, 1997; Sill, 2005; Ekanayake, 2012; Pina, 2013). It is important to note that these studies narrowed their attention to the effect of either monetary or fiscal policy on inflation without incorporating the effect of both policies in their studies. These findings have, at times, led to conflicting discussions on the direction of economic policy, which creates difficulties for policy makers in choosing an appropriate policy mix between fiscal and monetary policies that will enable faster growth of output in the economy and lower inflation.

Therefore, the motivation of this study is derived from various empirical studies on the Nigerian economy that have found diverse and, at times, contradictory empirical evidence on which direction should policymakers take and magnitude of the effects of some variables on inflation by incorporating both fiscal balance and money supply in one model.

1.3 Research Questions

Following the problem stated above, the researcher is compelled to ask the following questions:

  • To what extent does fiscal balance impact on inflation in Nigeria?
  • By how much does a change in the stock of money impact on inflation in Nigeria?
  • Which of the fiscal balance and stock of money has more impact on inflation in Nigeria?

                                              

 

1.4 Objectives of the Study

Upon the research questions raised above, the broad objective of this study is to evaluate the effectiveness of inflation control policies in Nigeria while the specific objectives are:

  • To examine the extent of the impact of fiscal balance on inflation in Nigeria.
  • To investigate by how much change in the stock of money impact on inflation in Nigeria.
  • To find out which of the fiscal balance and stock of money has more impact on inflation in Nigeria.

1.5 Research Hypotheses

Upon the specific objectives of this study, the following research hypotheses are formulated to guide the study:

  • H0: Fiscal balance has no significant impact on inflation in Nigeria.

H1: Fiscal balance has impact on inflation in Nigeria.

  • H0: Stock of money has no significant impact on inflation in Nigeria.

H1: Stock of money has significant impact on inflation in Nigeria.

  • H0: None of the fiscal balance and stock of money has more impact on inflation in Nigeria than the other.

H1: One of the fiscal balance and stock of money has more impact on inflation in Nigeria than the other.

 

1.6 Scope and Limitations of the Study

This study is delimited to the Nigerian economy and intends to cover the period between 1986 and 2015. The choice of this study period is purposely conceived to concisely reflect the period of structural adjustment in all sectors of Nigerian economy which came under the auspices of the Structural Adjustment Program (SAP) with the major objective of dismantling all government control (both in financial and in the real sectors) in all sectors of the economy. This period is believed to be unique as it marked the change of bearing of the course of Nigerian economy.

This research exercise, like every other research work, is really a rigorous one that consumes much time and energy especially in the area of data sourcing, data computation and modeling. This work is relatively limited base on time and financial constraints, data availability, precision of data and data range, as well as methodology adopted which could further be verified by future research. Nevertheless, the researchers have properly organized the research so as to present dependable results which can aid effective policy making and implementation at least for the time being.

 

1.7 Significance of the Study

This study will be of immense benefit to the Nigerian monetary authority (CBN), relevant government agencies (policy makers) and general public/students in various universities. To the monetary authority (CBN), the findings of this study will enable it (CBN) to choose the appropriate monetary policy instruments aimed at directly causing changes in the stock of money while ensuring economic stability that does not adversely affect the economy.

To the government, it will provide the necessary guidelines in choosing the appropriate expenditure and tax revenue mix that will be in harmony with the monetary policy to avoid crowding out private investment.

The findings of this research will also benefit the general public most especially the undergraduates of economics and other related disciplines in various universities who would want to carry out further research on this or any other related topic. It will also add to the volume of existing literatures that are available in the library on the topic and also serve as a source of reference for further research.

 

1.8 Organisation of the Study

This project research work is structured in five chapters as follows: chapter one which is the current chapter has the introduction; chapter two has the review of related literatures; chapter three discusses the research methodology; chapter four presents the empirical results and analysis; and finally chapter five which is the final chapter provides the summary of findings, conclusion and recommendations.

Project Price:

3,000.00

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