ABSTRACT
This study discusses impact of monetary policy on inflation in Nigeria and reviews theories o further the inflation. We went further to examine the impact of monetary policy instruments in Nigeria during the period 1980-2000. The broad objective is to identify monetary policy instruments that were used in combating inflation over this research period and used their impact to measure the effectiveness of monetary policy in Nigeria. It makes a important contribution to the literature by evaluating the magnitude and direction of the impact of broad money supply interest rate, cash reserve ratio of the commercial banks, liquidity banks and exchange rate inflation. The frame for analysis involves the estimation of inflation. The study employed classical least squares method with the aid granger causality, stationary test and correlogram which minimize the possibility of estimating spurious relations while at the same time retaining long-run information in the work; as well as the nature of causality between independent variables and dependent varia ble of the functions specified in this research work. The result of the analysis shows that the liquidity ratio and interest rate tumult to be the leading monetary policy instruments that can be employed to combat inflation in Nigeria. It was also revealed that, metical banking practices by Nigerian commercial banks has rendered cash preserved ratio, broad money supply and exchange rate important resulting to ineffective monetary policy in Nigeria economy.
TABLE OF CONTENT
Title page i
Certification ii
Approval page iii
Dedication iv
Acknowledgement v
Abstract vi
CHAPTER ONE
1.0 INTRODUCTION 1
1.1 Background of the study 1
1.2 Statement of the problem 6
1.3 Purpose of the study 7
1.4 Research question 8
1.5 Significance of the study 8
1.6 Scope/limitation of the study 9
1.7 Definition of terms 10
CHAPTER TWO
2.0 LITERATURE REVIEW 11
2.1 INTRODUCTION 11
2.2 Theoretical frame work on the evaluation of the 13
effectiveness of monetary policy in controlling inflation in Nigeria.
2.3 Current literature based on the study 16
2.4 Summary of the literature Review 20
CHAPTER THREE
3.0 RESEARCH METHODOLOGY 22
3.1 Research design 22
3.2 Area of study 22
3.3 Population of the study 22
3.4 Sample and sampling techniques 23
3.5 Instrument for data collection 24
3.6 Validation and reliability of the instrument 24
3.7 Distribution and retrieval of the instrument 25
CHAPTER FOUR
4.0 DATA PRESENTATION AND ANALYSIS 26
4.1 Presentation and discussion of the findings 26
CHAPTER FIVE
5.0 SUMMARY CONCLUSION, RECOMMENDATION 29
5.1 Summary of the findings 29
5.2 Conclusion 30
5.3 Recommendation 31
Reference 33
Appendix A 34
Appendix B 35
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The monetary policy of a country deals with controls of money stock (liquidity) and therefore, interest rate, in order to influence such macro economics variables as inflation, employment, balance of payment, aggregate output in the desired direction. There is no standard and idea structure of monetary policy target and instrument, the instrument varies from country to country depending on the size and stage of development of the financial market.
Over the years, the objectives of monetary policy have remained the attainment of external balance. However, emphasis on techniques / instrument to achieves this man pursuit of monetary, before and after 1986. The first phase placed emphasis on the direct monetary control, volume the second relies on market mechanism.
The monetary policy before 1986 the economic environment that guided monetary policy before 1986 was characterize by the dominate of the oil sector, the expanding role of the public sector. In order to maintain price stability and a healthy balance of payment position, monetary instrument such as credit ceiling, selective credit controls, administered interest and exchange rate, as well as the perception of cash reserve requirement and special deposits. The use of market based instrument was not feasible at that point because of the under developed nature of the financial market and the deliberate restraint of interest rate.
The most popular instrument of monetary policy was the insurance of credit rationing guideline, which primary set rate on the change for the component of commercial bank loan and advances to the private sector globally the problem of the inflationary is not peculiar, to Nigeria, but it is a general problem confronting the majority, if not all countries of the world. The attempt by Nigerian government to attain a higher level of economic development at this period, generally lead to inflationary spiral in the country.
But whether inflation in Nigeria is due to monetary mismanagement on the part of the authorizes concerned or caused by interest structural deficiencies,. Skill remains uncertain many factors have been identified to be responsible for inflationary pressure in the country. In a symposium of inflation in Nigeria held at university of Ibadan in 1983, November, most of the participant stressed on money supply, nature of Government expenditure f limitations in real output and the inflations, {imported} as the major causes of inflation in Nigeria. In the case of formulating monetary policy, it is of paramount importance to specify objectives and also impossible to evaluate performances.
Analysis of the institutional growth and structure shows that the financial growth rapidly in the aid 1980s and 1990s. The number of commercial banks rose from 34 – 64 in 1995 and since, decline to 51in 1998 while the number of merchant banks increased only to 12 in 1986, to 54 in 1991 and subsequently, decline to 38. In the network, the combined commercial and merchant bank branches rose from 12,549 in 1996. There was also substantial growth in the number of non-financial institutions especially insurance companies. The objectives of monetary policy since 1986 remained the same as in the earlier period namely, the stimulation of output and employment and the promotion of domestic and external stability. In line with the general philosophy of economic management under structural adjustment programme (SAP). Monetary policy can be develop for encouraging investment and controlling inflation, while fiscal policy can be effectiveness to reducing consumption of luxury and ostentation goods. But our major concern will be to explore the efficiency of monetary policy in an economy in controlling inflationary pressure in an economy like Nigeria.
It is generally, believed by some economist that inflationary effect are quite harmful to some business establishment. Thus so because vendor often lose in the sense that value of the money falls shorts of it original purchasing power. The extent of the effect of inflation in Nigeria could b appreciated from the following examples, in 1985, it stood at 5.5 percent, indicating an annual percentage increase of 20.1percent, compared to 40.9 percent in 1989.
It has been accompanied with high level of unemployment rate at 4.3 percent in 1985 and 18.5 percent in 1989. Thus has force Nigeria to adopt several monetary measures within and the problem of inflation as could be seen from the associated increases in the cost of production during the period under consideration. It is therefore, under the above that we will like to adopt some of mix of policy instrument used and license their efficiency as regard inflation control.
1.2 STATEMENT OF THE PROBLEM
Many attempts being made by the Nigeria authorities to attain higher rate of economic growth and development have generally being accompanied by certain degree of price increase in recent, years, the phenomenon developed into several and prolonged and stage inflation indeed, It is increasing being recognized that a process of rapid economic growth is likely to prove inflationary pressures. However, whether the problem of inflation in this country.
All the measure so far adopted were inadequate in solving the problem of inflation in the country the suffering of masses are unending as daily price surges occur indeed more for reaching solution to the problem is needed hence, this study seek to find what control has monetary policy on inflation.
Based on this, the following research questions are formulated to the study:
- Do you think that monetary policy have contributed positively in controlling inflation in Nigeria.
- Can the impact of central bank of Nigeria helps in controlling inflation?
- Can the impact of Central Bank of Nigeria helps in controlling inflation?
- Does inflation contributed to economic instability?
1.3 PURPOSE OF STUDY
- To examine the effectiveness of monetary policy in controlling inflation contributed to the Nigeria economy.
- To know the effect or relationship between money supply and the rate of inflation in Nigeria.
- To know the effect or relationship between gross domestic product and inflation.
- To know the impact of central of Nigeria of controlling inflation.
1.4 RESEARCH QUESTION
- Do you think that monetary policy have contributed positively in controlling inflation in Nigeria?
- Effectiveness of monetary policy in controlling inflation, does it have any positive effects?
- Does inflation contributed to economic instability?
1.5 SIGNIFICANCE OF THE STUDY
Full employment, equilibrium balance of payment economic growth and price stability are the four primary goals of any economy which Nigeria is not an exception.
It is therefore, the aim of this study first and foremost, of study the efficiency of monetary policy in controlling inflation in Nigeria. The important of this study to policy makers cannot be over emphasized in the economy considering the alarming rate of inflation increment over the years especially in the 90’s.
This study will therefore, be of immense help to policy, makers, government and at agent, ministers of finance, investors both foreign indigenous and the entire Nigeria populace.
This study will also study the type of inflation causes and ways of controlling it and it impact one economic development of Nigeria.
1.6 SCOPE OF THE STUDY
Since, inflation arises when aggregate demand exceed aggregate demand exceed aggregate supply, we shall focus our attention at examining the control monetary policy has on this primary variable.
In this, a year period is adopted 1984 to 1985. We hereby try to analyzed the causes effect of Nigeria inflation in terms of some qualifitable as money supply, real output etc.
1.7 DEFINITION OF THE TERMS
- Monetary Policy: This is the process by which the monetary authorities of a country control the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.
- Inflation: This is the adverse effect of general increase in prices of goods and service over a period of time.
- Budget Deficit: It is amount by which a government company or individuals spending exceeds it come over a particular period of time.
- Monetary Supply: It is a group of safe assets that households and business can be used to make payment or to hold a short term investments.
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