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THE EFFECTIVENESS OF
MONETARY POLICY AS A TOOL FOR CONTROLLING 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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