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PROJECT TOPIC AND MATERIAL ON IMPACT OF MONETARY POLICY ON PRICE STABILITY IN NIGERIA (1980-2016)
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- Name: IMPACT OF MONETARY POLICY ON PRICE STABILITY IN NIGERIA (1980-2016)
- Type: PDF and MS Word (DOC)
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The study examines the impact of monetary policy on price stability in Nigeria from 1980 to 2016. The Error Correction Mechanism (ECM) model was employed after conducting a number of diagnosis test and ensured the data were stable. The results of the analysis showed that interest rate has a greater impact on price stability in Nigeria, while other variables were found to have a joint significant impact on price stability in Nigeria. The study recommends that to reduce inflationary pressure in Nigeria, the monetary authority need to initiate and push forward effective and efficient monetary policy measures via interest rate in order to adequately stabilize prices.
1.1 Background to the Study
Price stability is the desire of every nation and has always been the core objective of monetary policy framework. This is borne of the perception that stability in prices of goods and services promotes economic growth. Price stability exists when there is sustainable low and stable inflation rate (CBN, 2011). Price instability is reflected in rising inflation in nearly all the world and it poses a threat to the economic progress of a nation, thus; making the pursuit for price stability an utmost priority for every nation. The Central Bank of Nigeria (CBN) is saddled with the responsibility of price stabilization in Nigeria. The CBN is empowered to carry out this responsibility through the provisions of the Banks and Other Financial Institutions Decree 25, 1991 (BOFID) (as amended) and the CBN Decree No. 24, 1991 (as amended). Price stability was pointed as a core target of the market economy and economic growth by the first conference of the Central Bank of European Countries in 2001. The role of monetary policy in achieving price stability cannot be over emphasized.
Price stability can assist to achieve maximum sustainable output growth and employment ultimately, however, in the short period; a number of challenges can exist between the goals (S. M. Nzoh et al, 2009) stated that the quest for price stability in the economy connotes the indirect pursuance of the goal of economic progress, which can exist only under conditions of price stability and financial market efficiency. The efficiency of the financial market is disrupted in the face of fluctuations in general price level. In Nigeria, investors perceive monetary policy and macroeconomic events as principal causes of the uncertainty in the equity market, implying that macroeconomic parameters’ shock could affect equity price as well as returns; thereby controlling the decisions of investors (E. A. Christopher, 2006).
In ensuring price stability, the Central Bank in Nigeria implements policies that guarantee sustained economic growth through appropriately changing levels of money supply. In Nigeria, CBN performs its function through the monetary policy programme. The process of arriving at the CBN’s monetary policy programme entails an appraisal of developmental changes in the economy over a specific period and designing policy measures that would ensure price stability (CBN, 2011). Monetary policy is formulated and implemented based on the volume and direction of money supply and accessibility of financial resources in the economy. (A. A. Owosekun, 2010) in his view says monetary policy is important for accessing the direction and magnitude of effect in changes of money supply and credit on the following; production, employment, price stability and economic growth and development. The CBN control the economy by influencing the activities and operation of Deposit money Banks (DMBs). Banks’ reserves are controlled by the apex monetary policy authority (CBN) using a number of monetary policy weapons – such as open market operation, liquidity ratio and cash reserve ratio (H. A Ajie et al, 2010)(I. S. N. Masha, 2004).
Inflationary pressure on the economy does not put the CBN at a vantage position to achieve price stability. The persistent increase in the price levels tends to lead to an upward trend in inflation rates. Despite the different monetary regimes that have existed in Nigeria, price instability still poses severe danger to driver of economic growth. Ever since the 1970s, Nigeria has witnessed fluctuations in inflation rate and consistent periods of double-digit inflation rate. The key problem facing CBN is how to curtail price instability in the face of other macroeconomic problems. The impetus for this study is a premise on the fact that price stability is fundamental to economic growth, employment generation, production and investors’ investment decisions, If this is correct, then there is need to investigate how monetary policy has achieved the desired result. This is because the literature on this role of CBN in Nigeria cannot be said to have been conclusive. Hence, further studies are required to establish the clear-cut effect of CBN’s monetary policy actions on price stability in Nigeria.
Against this background information, the study evaluates the impact of monetary policy on price stability in Nigeria from 1980 to 2016. This study sheds light into how the CBN has fared in its ability to maintain price stability and also make recommendations based on its findings.
1.2 Statement of the Problem
The primary objective of monetary policy in Nigeria is price stability. The emphasis given to price stability in the conduct of monetary policy is with a view of promoting sustainable growth and development as well as strengthening the purchasing power of the domestic currency among others (CBN, 2007). Hence, monetary authorities in Nigeria have formulated various policy measures to combat inflation and ensure price stability.
However despite these efforts that have been adopted by the Central Bank of Nigeria (CBN) over the years, inflation still remains a major threat to Nigeria’s economic growth. The failure of the monetary policy in curbing price instability has caused growth instability as Nigeria’s record of development has been very poor over the years. Furthermore, the reduction in the purchasing power which undermines the role of money as a store of value and stress investment and growth.
Nigeria’s experience of inflation is nothing good to write home about. For years, the Nigerian economy faced socio-economic stagnations traceable to inflationary spiral, particularly in the 1970s when inflation increased to a double digit. The analysis of the non-core inflation in the early 1990s reveals inflation rate of 63.6% in late 1994. Headline inflation rose rapidly by 1995 to reach an all-time high of 72.8%, though it decelerated gradually to a single digit in 1997. In the same vein, core inflation, which began a gradual ascent in early 1990, peaked at about 69.0% in the mid-1995 before slowing down in 1997. Since then, inflation remained at single digits between 1998 and 2001. In 2003, macroeconomic stability was restored, following the gains of a comprehensive and consistent economic reform program. The low inflation rate regime did not last for too long with the resurgence of spikes in headline and core-inflation between 2000 and 2001. Headline inflation rate remained at double digits between 2002 and 2005 as it recorded 12.9%, 14%, 15%, and 17.9% in the respective years. However, it decelerated dramatically to 8.24% and 5.38% in 2006 and 2007 before rising astronomically to 11.60% and 12.00% in 2008 and 2009 in that order, although fell marginally to 11.8% and 12.3% in 2010 and 2013 respectively (CBN 2014). Examining the above trend of inflation in Nigeria makes it imperative to investigate why monetary policy has not been able to stabilize prices over the years. With this, we are poised to ask the following research questions:
- What are the influences of monetary policy instrument on the level of inflation in Nigeria?
- What is the effectiveness of monetary policy on price stability?
1.3 Objectives of the study
The main objective of this study is to examine the impact of monetary policy on price stability in Nigeria from 1980 to 2016. Specifically it will:
- To determine the impacts of monetary policy instruments on inflation in Nigeria.
- To examine the effectiveness of monetary policy on price stability in Nigeria.
1.5 Statement of Hypothesis
The hypotheses to be tested in the course of this research work are:
Ho: Monetary policy instruments do not impact significantly on inflation in Nigeria.
H1: Monetary policy instruments impact significantly on inflation in Nigeria.
Ho: Monetary policy is not effective in determining price stability in Nigeria.
H1: Monetary policy is effective in determining price stability in Nigeria.
1.6 Significance of the Study
This study is significant in the following ways:
- It would provide an objective view to the effectiveness of the monetary policy in Nigeria.
- It would also provide an econometric basis upon which to examine the effect of monetary policies on inflation and the Nigerian economy as a whole.
- It would provide policy recommendations to policy makers on ways to combat price fluctuations through the money supply/monetary policies.
1.7 Scope and Limitations of the Study
This study will focus on the effectiveness of monetary policy in ensuring price stability which shall be restricted to the period between 1980 to 2016.The setbacks encountered in the course of this study includes inadequate finance and short time.
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