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PROJECT TOPIC AND MATERIAL ON ROLE OF MONETARY POLICY IN CONTROLLING INFLATION IN NIGERIA
The Project File Details
- Name: ROLE OF MONETARY POLICY IN CONTROLLING INFLATION IN NIGERIA
- Type: PDF and MS Word (DOC)
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The study examined the role of monetary policy in controlling inflation in Nigeria for the period of 1981-2014 using the Ordinary Least Squares Econometric Model. The empirical findings provide evidence that monetary policy proxied by the monetary policy rate (MPR) and money supply is not significant in controlling inflation in Nigeria which goes to suggest that inflation is no longer a monetary phenomenon in Nigeria. Thus, the study recommended that in order to control inflation and ensure price stability in Nigeria there is the need to consider the other non monetary factors that fuels inflation such as the cost and external factors so as to effectively tackle this macroeconomic problem in Nigeria.
1.1 Background of the Study
Inflation has become a significant problem for Africa and Nigeria in particular during the past thirty years. Since the first oil shock in the mid-1970s, African inflation rates have averaged more than 15 percent a year. For Sub-Saharan Africa, the average inflation rate has been closer to 20 percent a year. A few Sub-Saharan countries have even experienced inflation rates of 50 or even 100 percent a year (Batini, 2004).
Also, Inflation refers to a sustained rise in the prices of goods and services. When inflation occurs, the buying value of a currency unit evades, meaning that a person needs more money to buy the same product, most economists suggest that there is a direct relationship between the amount of money in an economy known as money supply and inflations levels. Understanding the relationship between money supply and inflation is far from easy or predictable since inflation can easily be influence and by other factors.
Generally, monetary policy refers to the combination of measures designed to regulate the values, supply and cost of money in an economy in consonance with the level of economic activity (Nnanna, 2001). Nyong(2001). Opined that monetary policy is concerned with changes in interest rate, money supply or other aggregates. It refers to action undertaken by the monetary authority to alter the equilibrium of the monetary market either by changing the money supply or altering the interest rate. monetary policy is a deliberate effort by the monetary authorities to control its monetary supply and credit conditions for the purpose of achieving certain broad economic goals. The aims of the monetary policy are basically to control the inflation, maintain a healthy balance of payment position for the country in order to safeguard the external value of the national currency and promote an adequate and sustainable level of economic growth and development. The formulation is done by the federal government mostly announced during budget speeches while the enforcement of the policy solely the responsibility of the central bank of Nigeria (CBN2007).
The emergence of substantial inflation in Africa has led to widespread debate about its causes. Many economists that favor traditional adjustment strategies contend that monetary growth, arising particularly from the domestic bank financing of large budget deficits, is the major source of inflationary pressures. By contrast, some critics of the traditional approach, such as the United Nations’ Economic Commission on Africa (UNECA) in its “African Alternative Framework for Structural Adjustment Programmes” (UNECA, 1989), have identified exchange rate depreciations as a major factor.
Controversy between these two viewpoints has led to differing prescriptions about the appropriate policy response. Those focusing on monetary factors have emphasized reducing government budget deficits and restraining credit to public enterprises, while advocating exchange rate depreciation to offset any overvaluation resulting from past inflation and deterioration in the terms of trade. Those emphasizing the role of exchange rate depreciation, by comparison, have argued against further exchange rate adjustments, preferring instead a combination of incomes policies, price controls, and demand reduction measures.
It has been argued that inflation distorts prices, diverts capital to rent seeking activities, compounds social and political problems, frustrates economic planning, encourages capital flight, discourages savings, reduces investment, retards economic growth and development, serves as tax on the poor and ultimately, reduces the living conditions of the people (Safdari et al 2011; Salam et al 2006; Badreldin 2014).
In order to avert these ills, monetary authorities all over the world have made conscious efforts to achieve low and stable inflation rates, using one form of monetary policy framework or the other. According to Borio (2014), this means leaning more deliberately against booms and easing less aggressively and persistently during busts.
In Nigeria, monetary policy measures are used to control inflation and other macroeconomic variables. This is the process by which the monetary authority of a country controls the supply of money to achieve macroeconomic objectives. Among the various monetary policy frameworks so far in use include exchange rate targeting, interest rate targeting, monetary targeting and recently the inflation targeting (Ojo, 2013).
Despite its importance, there has been surprisingly little research on the control of inflation in African countries. The few empirical studies on this issue have used traditional econometric techniques best suited to identifying whether individual variables are related to inflation. Thus, the relative importance of monetary policy in the control of inflation remains to be determined. It is on this background that this study would investigate the effectiveness of the monetary policy in combating inflation in Nigeria.
1.2 Statement of the Problems
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. Although, the problem of a developing economy such as (Nigeria). However, over the years, monetary policy measures are taken to control inflaton, yet there have been a consistent rise in inflation year in year out for instance in pre-SAP era (1980-1985), inflation rose from 57 percent in 1994 to 72.8 percent in 1995 dropped to 29.3 percent in 1996 and 8.5 perent in 1997, rose to 10 percent in 2001. In 2002 dropped to 12.9 percent and rose to 14 percent in 2003 and 15 percent in 2004, (CBN 2006) in 2005 it was 17.9 percent while it dropped again in 2006 to 8.2 percent, as of 2007 inflation was 5.4 percent while it increased again in 2008 to 11.6 percent in 2009. It was 12.1 percent in 2015. It reduced to 8.48 while in 2014 it was 8.06 percent (CBN 2014).
On a disaggregate analysis of the relationship between money supply and inflation on economic growth in Nigeria.
Thus the main aim of this study is to evaluate the effectiveness of the CBN’s monetary policy in combating inflation in Nigeria.
1.3 Objectives of the Study
The main objective of this study is to examine the role of monetary policy in controlling inflation in Nigeria. The specific objectives includes
- (i) To examine how money supply contributes to inflation in Nigeria.
- (ii) To determine the effect of monetary policy rate on inflation control in Nigeria.
- (iii) To empirically investigate the role of domestic credit in controlling inflation Nigeria
1.4 Research Questions
- What is the effect of Money supply on inflationary control?
- What is the effect of monetary policy rate on inflationary control?
- What is the effect of domestic credit on inflationary control?
Answering the above research questions would help us to see the extent to which the monetary policy variables have been effective in controlling inflation in Nigeria.
1.5 Research Hypothesis
The hypothesis to be tested in the course of this research work is:
H01: Money supply do not contribute to inflation in Nigeria
H02: Monetary policy rate contributes to inflation in Nigeria
H03: Domestic credit has no contribution to inflation in Nigeria
1.6 SIGNIFICANCE OF THE STUDY
The significance of this study lies in the fact that 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 policy on inflation and finally it would provide policy recommendations to policy-makers on ways to combat price fluctuations through the monetary policy.
1.7 SCOPE OF THE STUDY
The empirical investigation of the effectiveness of monetary policy in controlling inflation in Nigeria shall be restricted to the period between 1981 and 2014.
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