FINANCIAL DEREGULATION, STOCK PRICE VOLATILITY AND MONETARY POLICY IN NIGERIA

ABSTRACT

Germane to every monetary policy is the goal of achieving price stability. The objective of price stability essentially encapsulates the need to eliminate price expectations to zero and to eliminate the long run uncertainty about the price level. The trend is interesting and indeed focused within the purview of two monetary frameworks – inflation targeting and monetary targeting extremes. The Nigerian CBN has been on both sides of this divide. In between this divide is found the income targeting frameworks and the Friedman-type policy rule which itself has been criticized for reasons of perceived instability in the demand for real money balances by monetary targeting advocates.

Consequently, the objective of this study is to determine whether inflation expectation and price volatility have any significant influence on inflation in Nigeria, and; ipso facto determine the extent to which monetary policy have eliminated expectations and volatility in the price level.

CHAPTER ONE

1.0  GENERAL DESCRIPTION OF STUDY

Germane to every monetary policy is the goal of achieving price stability. The objective of price stability essentially encapsulates the need to eliminate price expectations to zero and to eliminate the long run uncertainty about the price level. The trend is interesting and indeed focused within the purview of two monetary frameworks – inflation targeting and monetary targeting extremes. The Nigerian CBN has been on both sides of this divide. In between this divide is found the income targeting frameworks and the Friedman-type policy rule which itself has been criticized for reasons of perceived instability in the demand for real money balances by monetary targeting advocates.

Proponents of inflation targeting on the other hand are quick to point to the fact that monetary targeting is an ineffective strategy, because of the underlying core inflation, which accommodates persistent inflationary pressures, which are transmitted into inflation expectations.

While inflating expectation and long-run price volatility keeps generating interest, little in terms of studies and policy focus has been on these in Nigeria.

So far the studies on Nigeria’s inflation have been able to tell us that expectations in the price level have been tested under adaptive expectations whereas the assumptions for rational expectations of prices are considered to be too strong for prices. It is imperative therefore, to examine the ability of monetary policy at reducing forward-looking expectations to tolerable levels that are consistent with desired level of prices.

And more so, the concentration has been on the causes of inflation in Nigeria, where as the role of monetary in the context of Nigeria’s current framework is not shown to be capable of circumventing or eliminating distortions in the price level occasioned by uncertainty and forward-looking expectations.