1.1 BACKGROUND TO THE STUDY
economic and financial situation of a country is largely based on the monetary
policy being implemented by the Central Bank of the country. It is widely
agreed that monetary policy can contribute to sustainable growth by maintaining
price stability. According to Christiano and Fitzgerald (2003), when the rate
of inflation is sufficiently low households and businesses do not have to take
into account when making everyday decisions. A government manages its economy
through the combined actions of fiscal and monetary policies. The notable and
visible element in fiscal policymaking which is directly influenced by
government’s expenditures both recurrent and investments, the government
adjusts its spending levels in order to monitor and influence the nation’s
policy is the process by which the monetary authority of a country controls the
supply of money, often targeting a rate of interest for the purpose of
promoting economic growth and stability. Its official goal is to usually
include relatively stable prices and low unemployment. In practice, all types
of monetary policy involve modifying the amount of base currency in
circulation. This process of changing the liquidity of base currency through
the open sales and purchases of (government-issued) debt and credit instruments
is called open market operations. The constant market transactions by the
monetary authority modify the supply of currency and this impacts other market
variables such as short term interest rates and the exchange rate. Monetary
theory provides insight into how to craft optimal monetary policy, this is
referred to as either being expansionary or contractionary, where an
expansionary policy increases the total supply of money in the economy more
rapidly than usual, and contractionary policy expands the money supply more
slowly than usual or even shrinks it (Lipsey et al., 2001).
is typically a broad measure, such as the overall increase in prices or the
increase in the cost of living in a country. McMahon (2007) defined it as an
increase in the price a person pays for goods. During inflationary periods
opportunity cost of holding money is increased causing inefficient use of real
resources in transactions. Therefore, inflation weakens the purchasing power of
money and sinks the standard of living of the citizenry. Policy makers have
tried to adopt appropriate policies that can combat inflation and ensure price stability.
Generally, the level of money supply and the stock of goods and services are
two crucial factors that determine the level of inflation in an economy. When
inflation becomes persistent, the duo becomes the primary targets of policies.
An excess or shortage in the supply of money could either induce excess
aggregate demand resulting in higher inflation rate or induce stagnation thus
retarding economic growth and development. While fiscal policy proves helpful
in combating inflationary pressure, monetary policy has been the principal tool
often employed by the central banks to ensure price stability. While it is not
arguable that monetary authority have formulated various policy measures as an
attempt to curbing inflationary menace, the effectiveness of policy pursuit to
curb inflationary environments is questionable as most economies, particularly
developing ones still experience inflationary challenges.
1.2 STATEMENT OF THE PROBLEM
of the impact monetary policy has on financial condition in the economy (not
just the cost, but also the availability of credit or bank’s willingness to
assume specific risk) but also because of its influence on expectations about
economic activity and inflation, monetary policy can affect the prices of
goods, assets prices, exchange rate as well as consumption and investment
(Oesterreichische National Bank, 2002).
monetary policy impulse (e.g. an interest rate change by the Central Bank,
change in the monetary base resulting from changes in minimum reserve rate) has
a lagged impact on the economy.
Moreover, it is uncertain how exactly monetary policy impulses are
transited to the price level or how real variable develop in the short and
difficulty of the analysis is to adjust the effect of the individuals channels
for external factors e.g. supply and demand shocks, technical progress or
structural change may be superimposed on the effect of central bank measures,
and it is difficult to isolate monetary policy effects on various variables for
analytical purposes. Moreover, the time
lag in the reaction of the real sector to monetary measures renders the
analysis more difficult. Hence monetary policy must be forward looking
(Oesterreichische National Bank, 2002).
As far as Nigeria
concerns regarding inflationary effects it has been experienced worst
consequences reflected by poverty, food crises, price hike etc. Mahmood et al,
(2009) concluded that inflation causes poverty. Day to day increase in prices
of commodities especially of non-food items like oil and gas snatch money from
savings of consumers and uncertainty of prices, both food and non-food items,
generate enthusiasm among people toward earn more and more therefore, people
prefer to work over recreation underestimating their Health.
Muoghalu, et.al. (2010) found
that the inflation brings negative impact while exports and investment brings
positive impact on Nigeria economy and suggested that we should encourage a
larger scale of export promotion activities to enhance the economic growth. It
will create numerous job opportunities which increase the per-capita earnings
and standard of living.
OF THE STUDY
The main objective of this
research is to empirically examine the impact of monetary policy in controlling
inflation in Nigeria between the year 1980 to 2013.
Specifically, the study also
To examine the various types of monetary policy that can be used
to combat inflation and other macro-economic problems.
To highlight the relevance of monetary policy in combating
Proffering appropriate framework
based on the policy recommendations made.
study aims at answering the following research questions:
i Does a long or short run relationship or both exist between
monetary policy and inflation?
ii. To what extent has Nigeria’s
monetary policy controlled inflation?
iii. What are the factors
that hinder appropriate monetary policy?
iv. What has the factors
that has spur the incessant rise in inflation?
The following hypothesis
will be tested in the course of this study:
H0: liquidity ratio has no significant impact in controlling inflation
ratio has significant impact in controlling inflation in Nigeria.
H0: Money supply has no significant impact in controlling inflation in
supply has significant impact in controlling inflation in Nigeria.
H0: Exchange rate has no significant impact in controlling inflation
rate has significant impact in controlling inflation in Nigeria.
H0: Interest rate has no significant impact in controlling inflation
rate ratio has significant impact in controlling inflation in Nigeria.
OF THE STUDY
The findings of this study will provide an insight as
to whether monetary policy has any significant impact in controlling inflation
in Nigeria’s economy. Hence, policy makers will be able to formulate an
articulate and comprehensive policy with respect to monetary instrument in
Nigeria. This research will also provide
an objective view to the relevance of monetary policy in controlling inflation
in Nigeria. Government will benefit immensely from this
research works as the topic is very relevant in the field of macro-economic
The findings of this research will also serve as a useful reference material for further research on the impact of monetary policy
in controlling inflation in Nigerian economy.
The analysis that will be made in this study shall be based on
macroeconomic data in Nigeria economy. Due to the linearity nature of the model
formulation, Ordinary Least Square (OLS) estimation method would be employed in
obtaining the numerical estimates of the coefficients in the model using
Two multiple regression models shall be used in the estimation. The
model shall seek to investigate the impact monetary policy in controlling
inflation in Nigeria. This is a follow up on the objectives of study
The economy is a large component with lot of
diverse and sometimes complex parts; this research work will only look at a
particular part of the economy (Macro economy policy). This work cannot cover
all the facets that make up macro economy, but will look at monetary policy has
been used by the government for the stabilization, and attaining economic development.
The empirical analysis and estimation covers the
period between 1980 and 2013. This restriction is
unavoidable because of the non-availability of some data.
The data for this study would be obtained mainly
from secondary sources; particularly from Central Bank of Nigeria (CBN)
publications such as the CBN Statistical Bulletin, CBN Annual Reports and
Statements of Accounts, and National Bureau of Statistics publications.
1.9 LIMITATIONS OF THE STUDY
is one of the elements that assist a good research. Financial constraint
created difficulties in the process of this research work; however, it did not
hinder the research.
The main limitation of this study is time constraint.
The time allotted for the completion of this research is not adequate based on
recent and contemporary happening with respect to the impact of monetary policy
in controlling inflation in Nigerian economy.
1.10 ORGANISATION OF THE STUDY
This study shall be divided into five chapters. The
first chapter provides the background of the subject matter justifying the need
for the study. Chapter two presents related literature concerning monetary
policy and inflation in Nigeria.
The research methodology, which includes the theoretical framework, sources of
data, model formulation, estimation techniques etc, are stated in chapter three
while data presentation, analysis and interpretation of regression result were made in chapter four. Concluding comments in chapter five
reflects on the summary, conclusion, recommendations and suggestion for further
studies based on the findings of the study.
Expansionary Monetary Policy: Is
a monetary policy that seeks to increase the size and volume of money supply,
it can be increase by buy bonds in exchange for hard currency payment to adds
that amount of currency to the money supply.
Contractionary Monetary Policy:
This is the policy that can be implemented by reducing the size and volume of
monetary base by the way of sell bonds in exchange for hard currency, by so
doing it removes that amount of currency from the economy.
Commercial banks are required to maintain certain reserve requirement in order
to control their liquidity and influence their credit operations, these are
usually expressed as a percentage of customers deposits.
Discount Rate: The
discount rate is the rate of interest the monetary authorities charge the
commercial banks on loans extended to them. If the Central Bank wishes to
increased liquidity and investment, it reduces the discount rate, and on the
other hand if the Central Bank wishes to reduce liquidity in economy, it raises
the discount rate.
The Central Bank imposes upon the bank a minimum liquidity ratio, being vary to
the needs of the situation. It is designed to enhance the ability of bank to
meet cash withdrawals in them by their customers. Such liquidity ratio stands
for the proportion of specified assets.
Open Market Operation (OMO): This
involves the Central Bank Discretionary power to sell or purchase securities in
the financial market in order to influence the volume of credit and interest
rate which consequently affect money supply. The securities include treasury
certificates, treasury bill and development stock
Is the act of public pronouncements or outright appeal on the apart of monetary
authorities to the banks requesting them to operate in a particular direction
for the realization of specified government objectives.
This is a process whereby the real per-capital income of a country increases
over a long period of time. Economic growth is measured by the increase in the
amount of goods services produced deposits are savings and currents account of
deposits in a commercial bank.
Is a currency with the public and demand deposits with commercial banks. Demand
deposits are savings and current account of depositors in a commercial bank.
Economic Life Cycle:
This refers to a view of product design, each stages of the product’s life is
assessed in terms of cost, at each stage of this life cycle choice have to be