This study examined impact of monetary
policy on price stability in Nigeria within the sample period, 1981-2013. Monetary policy refers to
combination of measures designed to regulate the values, supply and cost of
money in an economy in consonance with the level of economic activity. The data for this research
work was obtained from the CBN Statistical Bulletin (2013) and analysed using
ordinary least squares (OLS) technique. Inflation was regressed against Money
Supply, Exchange Rate and Interest Rate. Certain econometrics tests were
conducted such as Unit Root test, Cointegration test and Error Correction
Model. The result shows that monetary policy for the period under review
had impact on economic growth of Nigeria. The unit root test indicates that INF was station nary at level while
two of the variables (EXR and INT) were stationary at first differencing, while
the ( M2) are stationary at second differencing. The Cointegration
test revealed that the variables have long run relationship with economic
growth of Nigeria within the sample period.
The ECM result (59%) suggests
that if in the short run
variables deviate from equilibrium, they tend to re-adjust themselves back to
equilibrium in the long run. The f-statistic of the estimated model is 19.11
which shows that the joint influence of the explanatory variables on the
dependent variable is statistically
significant. The R2 is 0.8484 which shows that about 85% of
the total variations in inflation rate is explained by variations in Broad
money supply (M2), Exchange Rate (EXR) and interest Rate (INT). Also
the durbin-Nation statistic of 1.91 shows that there is no evidence of positive
serial correlation in the estimated model. Based on these findings, the
research recommends among others: Government should endeavour to make the
financial sector viable as it is in
developed countries.
TABLE OF CONTENTS
Title page i
Approval ii
Dedication iii
Acknowledgement iv
Abstract vii
Table of Contents v
CHAPTER ONE: INTRODUCTION 1
1.1 Background to the Study 1
1.2
Statement of the Problem 3
1.3 Research
Questions 4
1.4
Statements of Research Objectives 4
1.5 Hypotheses of
the Study 5
1.6
Significance of the Study 5
1.7 Scope And Limitations of the Study 5
CHAPTER TWO: LITERATURE REVIEW 7
2.1 Theoretical
Literature 7
2.1.1 The Quantity Theory of Money 7
2.1.2 Keynesian Theory of Inflation 10
2.1.3 Monetarists’ Theory of Inflation 13
2.1.4 Structuralists Theory of Inflation 14
2.1.5
Trends in Monetary Policy and Inflation in Nigeria 16
2.1.6 Monetary
Policy Instruments in Nigeria 19
2.2 Empirical Literature 21
CHAPTER THREE: RESEARCH METHODOLOGY 27
1.3 Research
Design 27
3.2 Model
Specification 27
3.3 Method
Of Estimation 28
3.4 Method
Of Evaluation 28
3.5 Data Required And Sources 30
CHAPTER FOUR: PRESENTATION AND
ANALYSIS OF RESULTS 31
4.2 Tests for
Cointegration 32
4.3 Error
Correction Mechanism 33
4.4 Verification of
Hypotheses 35
4.5 Implication of
The Study 36
CHAPTER FIVE: SUMMARY,
RECOMMENDATIONAND CONCLUSION 38
5.1 Summary Of
The Findings 38
5.2 Recommendation 39
5.3
Conclusion 40
REFERENCES 41
APPENDICES 45
The
word inflation has become a household name in most developing and African
countries, Nigeria inclusive. Inflation is a monster that threatens any economy
although some author argues that its moderation is required for sustainable
economic growth. However it is noted that inflation is inimical to economic
growth. The problem of inflation surely is not a new phenomenon because it has
remained a major problem in the country over the past few years. In the words
of Adenuga, (2012), it is a monster which threatens all economies because of
its undesirable effects. Inflation can
be defined, as a significant and sustained increase in the general price level
over a period of time.
According
to Umaru and Zubairu, (2012), the concept of inflation can be defined as a
persistent rise in the general price level spectrum of goods and services in
the country over the long period of time. Although several people, producers,
consumers, professional, trade unionist, workers and the likes, talk frequently
about inflation particularly if the malady has assumed a chronic character, yet
only selected few knows or even bother to know about mechanics and consequences
of inflation.
According
to a report by Masha (CBN 2009), there have been four major episodes of high
inflation in excess of 30 percent in Nigeria. The first period of inflation in
the 30 percent range was in 1976 (CBN, 2009). This was attributed to the
drought in northern Nigeria which destroyed agricultural production and pushed
up the cost of agricultural food items coupled with excessive monetization of
oil export revenue, which might have given the inflation a monetary character.
The
period of Structural Adjustment Programme in the late 1980s, and the effect of
wage increases created cost push inflation. Hence, in 1985, inflation peaked at
40 percent at a time of relatively little growth in the economy. At that time,
the government was under pressure from debtor groups to reach agreement with
the International Monetary Fund (IMF), one of the conditions of which was the
devaluation of the domestic currency. The expectation that devaluation was
imminent fuelled inflation as prices adjusted to the parallel rate of exchange.
Over the same period, excess money growth was about 43 percent (CBN, 2009)
The
third high inflation episode started in the last quarter of 1987 and
accelerated through 1988 to 1989. This episode is related to the fiscal
expansion that accompanied in 1988 budget. However, with drastic monetary
contraction initiated by the authorities in the middle of 1989, inflation fell,
reaching one of its lowest points in 1991at 13% (CBN, 2009).
The
fourth inflationary episode occurred in 1993, and persisted through the end of
1995. Though inflation gathered momentum towards the tail end of 1992, it
reached 57 percent by the end of 1994, and by the end of 1995, it was 72.8
percent (CBN, 2009). This was equally attributed to a period of expansionary
fiscal deficit and money supply growth. Between 1996 and 2011, inflation rate
has fallen considerably though still in double digit.
There
has been widespread debate between two schools of thought on the causes of
inflation which led to different prescription about the appropriate policy
response to be adopted. The traditional monetarists stress the importance of
the link between money supply and inflation. They therefore emphasized measures
such as reduction in government budget deficits and restraining credits to
public enterprises as a panacea to inflation.
However,
the structuralists school sees financial factors as forces propagating
inflation rather than causing it. The structuralists are of the view that
inflation can result from a number of special problems in developing countries,
not just from excessive money growth, thus they favour income policies as a
measure of controlling inflation.
According to Anyanwu and Oaikhenan (1995),
the quasi competitive Keynesian theory of inflation states that at competitive
equilibrium, “structural imperfections” inherent in a monetary economy generate
upward pressure on the price level.
It is generally believed that the
attainment of every other macroeconomics goals (full employment, economic
growth etc) depends on the maintenance of a stable and low inflation
environment (Ajide and Lawson, 2012).
It is on this background that this study
would investigate the impact of monetary policy on inflation control in
Nigeria.
Monetary
policy is known to be a vital instrument that a country can deploy for the
maintenance of domestic price and exchange rate stability, as a critical
condition for the achievement of a sustainable economic growth and external viability”
(Amassona, 2011). In general terms, monetary policy refers to a combination of
measures designed to regulate the value, supply and cost of money in an economy
in consonance with the expected level of economic activity (Okwu , 2011;
Adesoye , 2011).
Since
its establishment in 1959, the Central Bank of Nigeria (CBN) has continued to
play the traditional role expected of a central bank. This role is anchored on
the use of monetary policy that is usually targeted towards the achievement of
price stability among other goals. Over the years, inflation targeting and
exchange rate policy have dominated CBN’s monetary policy focus based on the
assumption that these are essential tools of achieving macroeconomic stability
(Aliyu and Englema, 2009). The exchange rate regime was in vogue in Nigeria
between 1959 and 1973 while the direct monetary control technique was in place
from 1974 till 1993 when the CBN formally introduced its open market operation
(OMO) as a major indirect tool of monetary policy; hence indirect monetary
control has been in vogue from 1993 till date.
Giving
that during inflation, money losses value and people are discouraged from
savings which ultimately affect the volume of money in the money market and
investment as well, various governments had introduced lots of policy measures
in Nigeria prominent among which are fiscal and monetary policy. But despite
the intensified use of these policies over the years, inflation still remains a
major threat to Nigeria’s economic growth which raises the following questions:
1.
To what extent have monetary policies been
effective on price stability in Nigeria?
2.
Is there any long-run relationship between
inflation and monetary policy in Nigeria?
The
extent to which price stability have been achieved as a result of the adoption
of various policies of monetary control in Nigeria is an economic issue that
requires investigation. Hence, the main thrust of this study shall be to
evaluate the impact of CBN’s monetary policy on inflation in Nigeria.
This research shall be
guided by the following questions.
i.
To what extent has monetary policy
impacted on price stability in Nigeria?
ii.
Is there any long-run relationship between
monetary policy and price stability in Nigeria?
The
main objective of this study is to assess the effectiveness of the monetary
policies in ensuring price stability in Nigeria. Specifically, the research
shall;
1.
Examine the impact of monetary policy on
price stability in Nigeria;
2.
Investigate if there is any long-run
relationship between monetary policy and price stability in Nigeria;.
1.
H0: There is no significant
impact of monetary policy instrument on price stability in Nigeria.
2.
H0: There is no long-run
relationship existing between monetary policy instruments and price stability in
Nigeria.
This
study will make meaningful contribution to the general knowledge and
understanding of the nature of monetary policy and its application in the
Nigerian environment. It is also envisaged that it could arouse interest
adequately to stimulate further research in the area of inflation. The study would also provide an econometric
basis upon which to examine the effect of monetary policy on inflation in
Nigeria.
Lastly, it would provide policy
recommendations to policymakers on ways to combat price fluctuations.
This study will focus on inflation rate as a
macroeconomic variable. It will cover many facets that make up the monetary
policy and empirically investigate the effect of the major ones on inflation.
The empirical investigation shall be restricted to the period between 1981 and
2013. Data and information for this study shall be sourced from the internet,
library and from Central Bank’s statistical reports for the years under review.
Secondary date would be used in this study.
The major factor which
inhibited the success of this work is date accessibility. Access to secondary
date posed a lot of problem since it was common to observe inconsistent data on
the same economic variable for the same period. Time constraint was equally a
factor since the researcher had to decide how best to allocate his limited time
among his numerous attention- seeking engagements. In spite of these problems,
a lot of efforts were put in place to enhance the quality of this study.
Click “DOWNLOAD NOW” below to get the complete project material
FOR QUICK HELP CHAT WITH US NOW!
+(234) 0814 780 1594
Click “DOWNLOAD NOW” below to get the complete Projects
FOR QUICK HELP CHAT WITH US NOW!
+(234) 0814 780 1594
Buyers has the right to create
dispute within seven (7) days of purchase for 100% refund request when
you experience issue with the file received.
Dispute can only be created when
you receive a corrupt file, a wrong file or irregularities in the table of
contents and content of the file you received.
ProjectShelve.com shall either
provide the appropriate file within 48hrs or
send refund excluding your bank transaction charges. Term and
Conditions are applied.
Buyers are expected to confirm
that the material you are paying for is available on our website
ProjectShelve.com and you have selected the right material, you have also gone
through the preliminary pages and it interests you before payment. DO NOT MAKE
BANK PAYMENT IF YOUR TOPIC IS NOT ON THE WEBSITE.
In case of payment for a
material not available on ProjectShelve.com, the management of
ProjectShelve.com has the right to keep your money until you send a topic that
is available on our website within 48 hours.
You cannot change topic after
receiving material of the topic you ordered and paid for.
Login To Comment