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THE
EFFECTIVENESS OF MONETARY POLICY AS A TOOL FOR CONTROLING INFLATION IN NIGERIA
(1980-2004)
ABSTRACT
This study
is designed to empirically analyze the effectiveness of monetary policy as a
tool for controlling inflation in Nigeria.
To
investigate on this, hypothesis were formulated as follows:
Ho: Monetary policy measures adopted
over the years have no significant impact in inflation control in Nigeria.
Hi: monetary policy measures adopted
over the years have significant impact on inflation control in Nigeria.
The researcher adopted the method of
linear regression, the ordinary least square (OLS) technique in analyzing the
secondary data of inflation rate and money supply (1980-2004). The researcher
were further subjected to t-ratio and f-tests, the result of which confirmed.
I. Monetary policy measures adopted
by the monetary authorities between 1980 and 2004 were not effective and had no
significant impact in controlling inflation.
2. Quick
monetary remedies for inflation control do not
exist.
Based on the
above findings, the following are the policy recommended:
The elimination of inflation requires
the eradication of inflationary expectation.
Government should concentrate more on
productive investment, which will reduce inflationary pressure in Nigeria.
The monetary authorities should
maintain vigilance in its efforts to keep inflation in check by adhering to
effective monetary and fiscal policies.
Government should monitor the
implementation of monetary policies to ensure its success.
It is believed that if the monetary
authorities follows the above
recommendation, effective will be achieved.
TABLE OF
CONTENTS
CHAPTER ONE
1.0
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
1.2 STATEMENT OF THE PROPLEM
1.3 OBJECTIVES OF THE STUDY
1.4 HYPOTHESIS OF THE STUDY
1.5 SIGNIFICANT OF THE STUDY
1.6 SCOPE OF THE STUDY
1.7 DEFINITION OF TERMS
CHAPTER TWO
2.0
LITERATURE REVIEW
2.1 THE MEANING OF MONETARY POLICY
EVOLUTION AND APPLICATION OF MONETARY
POLICY
INSTRUMENTS IN NIGERIA
2.2 EMPIRICAL LITERATURE
2.2.1
OBJECTIVE OF MONETARY POLICY IN NIGERIA
2.2.2 RECENT DEVELOPMENT OF THE NIGERIA MONETARY
POLICY
2.2.3 PRE-STRUCTURAL ADJUSTMENT PROGRAMME (SAP)
MONETARY POLICIES IN NIGERIA
2.2.4 POST-SAP MONETARY POLICIES IN NIGERIA
2.2.5 THE
IMPACTS OF NIGERIA’S MONETARY POLICIES IN
THE INFLATION CONTROL
2.3 ECONOMIC IMPLICATION / CONSEQUENCES OF
MONETARY POLICY.
CHAPTER THREE
3.0
METHODOLOGY
3.1 THEORITCAL FRAMEWORK
3.2 MODEL SPECIFICATION
3.3 METHOD OF EVALUATION
3.4 DATA REQUIREMENT AND SOUCE
CHAPTER FOUR
4.0 DATA PRESENTATION AND ANALYSIS
4.1 EMPERICAL RESULTS
4.2 STATISTICAL TEST OF SIGNIFICANCE
4.3 EVALUATION OF THE WORKING HYPOTHESIS
4.4 IMPLICATION OF THE RESULT
CHAPTER FIVE
5.O SUMMARY OF FINDING, CONCLUSION AND
RECOMANDATION
5.1 SUMMARY OF FINDING
5.2 CONCLUSION
5.3 RECOMMENDATIONS
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Nigeria still presents a clear
reflection of the third world economy in which the growing economy has some
working machinery, monetary and fiscal policies that aimed towards maintaining
a balance in the entire economy so that growth and development, which is the
ultimate goal of every economy, is realized.
Generally, 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. 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 monetary policy are basically to control the
inflation, maintain a healthy balance of payment positions 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 is solely the responsibility of
the central bank of Nigeria (CBN)>
Inflation is the greatest challenge
faling most developing countries like Nigeria today.
Inflation is
defined as a persistent and appreciable increase in the general prices level of
goods and services in the economy. Inflation has being the “clas in the wheel”
that motivates economy. It has made export products to become expensive in the
international market and this impeded the expansion of the export market.
Effective monetary policy produces
economic growth and development. For a country such as Nigeria to achieve
economic stability, she must place priority on efficient monetary policy. It is
pertinent to note that the central bank has not been able to come up with
credible monetary policy in the recent times (years) to cure the unemployment,
low saving, debt burden, low investment, unfavorable balance of payment, mass
poverty treating the nation interest rate and high exchange rate.
It has been observed that the
Nigerian economy within the last 25 years has been engulfed in some economic
problems. In Nigeria, inflation has been a serious economic problem for many
years. Prices of goods and services has been on the increase and this has
affected every aspect of the economy. Cost of living has been very high with
the consequences of poor living standard and less savings.
With the present economic crisis
playing the nation, Nigerians are yawning for credible monetary policy either
expansionary or contractionary monetary policy depending on what economic goal
the policy maker want to achieve. It becomes necessary for the monetary
authorities to use various monetary policy. Instrument available to them. Such
instruments are the general credit control and selective credit control
instruments. Under the general credit control instruments are the open market
operation (OMO), Rediscount rate, Reserve Requirement and Moral suasion, while the
stock market margin requirements, control of terms of installment sales,
mortgage credit restrictions and special directive belong to the selective
credit control instrument.
Given the above policy tools, it is
expected that the monetary authorities through its agents, the commercial banks
and financial intermediaries e.t.c will be able to make monetary policy reform
for the economic well being of the country and thus the monetary policy
objective such as inflation control will be attained. The measure of a
country’s monetary policy rests on the extent to which it has achieved the aims
and objectives of its monetary policy. Hence the focus of this policy is on
effectiveness of monetary policy as a tool for controlling inflation in
Nigeria. This is to find out whether the monetary measures adopted so far has
been able to achieve the desired objectives.
1.2 STATEMENT OF THE PROBLEMS
The
application of the monetary policy by the monetary authorities using the
monetary instruments such as open market operation, Banks reserve e.t.c, in
consonance with the prevailing economic situation is aimed at achieving the
macro economic goals of the country such as low level of inflation, stable
price rate and full employment, etc but in Nigeria, in spite of the numerous
monetary policy measures adopted, the economy still suffers the problem of
inflationary pressure, poverty, unemployment e.t.c.
The question that follows are: How
effective are monetary policies in controlling some of these variables,
inflation in particular, in Nigeria and how effective are these instruments
employed? Why has inflation persisted in the Nigerian economy in the face of
sustained government effort to curb it? Why have monetary policies failed in
our country despite that they have worked in other countries? Do their
functioning conform with a prior economic expectation? What may be the other
reasons militating against the effectiveness of monetary policies?
It is against this that the
researcher is undertaken in order to find out the effectiveness of monetary
policy in controlling the rate of inflation and money supply in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The
objective of the study is to identity some of the highlights of the monetary
measures designed and adopted in this country since the establishment of CBN to
achieve the desirable economic goal. Despite the adoption of these seemly far-
reaching and suitable measures, the achievement of these objectives seems to
have eluded as so far.
It was based on this background that
this projects sets out:
1. To find out if monetary policy
measures adopted by the monetary authorities have succeeded in controlling
inflation in Nigeria.
2. To examine the relationship between
money supply and inflation.
3. To find out the effectiveness of
monetary policy in achieving economic growth during the period under study
(1980-2005)
1.4 HYPOTHESIS OF THE STUDY
Ho: Monetary policy measures adopted over the
years have no impact on inflation
control in Nigeria.
Hi: Monetary policy measures adopted over the
years have impact on inflation control in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
The finding of this study, if a
comprehensive and thorough research on this work is done would be relevant in
the following ways.
The study will be of immense value to
monetary authorities in formulating monetary policy especially this time around
the nation is faced with economic crisis. Economic development is the dream of
every nation, this study is timely and will go a long way to show how effective
the use of monetary policies are used to achieve there charming national
economic objectives and to redirect future economic planners or monetary
authorities.
To the business world, this study
will throw on insight into the working of Nigeria economy and will form a guide
to their business.
Finally, it would be great benefit to
those who may embark on a similar study.
1.6 DEFINITION OF TERMS
MONETARY
POLICY: According to CBN Briefs (1994) monetary policy refers to the
combination of measures designed to regulate the value, supply and cost of
money in an economy, in consonance with the level of economic activity.
MONEY
SUPPLY: This refers to the total value of money in the economy and this
consists of currency (notes and coins) and deposit with the commercial bank and
merchant bank. Types of money supply include M1, M2 and M3 .
Money supply (M1): This is the currency in
circulation (notes and coins) outside banks, plus demand deposite held in
banks, (c+ DD).
QUASI MONEY:
refers to the saving and time deposite with commercial banks.
MONETARY
BASE: Also known as high powered money or reserve money comprises certain
liabilities of the CBN and include currency with the non- bank public and total
banks reserve.
MONETARY
AUTHORITIES: The money sub-sector is responsible for currency issues, credit
control, managing the country’s informational reserves and maintaining general
supervision of the monetary system.
RESERVE
REQUIREMENT: Refers to the proportion of total deposit liabilities, which the
commercial and merchant banks are expected to keep as cash in their vault and
deposite with the CBN.
OPEN MARKET
OPERATION: Involve the discretion and
power of the CBN to purchase or sell securities in the financial markets in
order to influence the volume of liquidity and levels of interest rates, which
ultimately will affect the monetary supply.
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