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PROJECT TOPIC  : THE ROLE OF MONETARY POLICY IN CONTROLLING INFLATION

IN NIGERIA (1980 – 2005)

PROJECT PROPOSAL/CHAPTER ONE

1.1 BACKGROUND OF THE STUDY
Inflation has become a significant problem for Africa and Nigeria in particular during the past twenty years. Since the first oil shock in the mid-1970s, African inflation rates have averaged more than 15 percent a year. For Sub-Saharan Africa, the average inflation rate has been closer to 20 percent a year. A few Sub-Saharan countries have even experienced inflation rates of 50 or even 100 percent a year (Batini, 2004).

The emergence of substantial inflation in Africa has led to widespread debate about its causes. Many economists that favour traditional adjustment strategies contend that monetary growth, arising particularly from the domestic bank financing of large budget deficits, is the major source of inflationary pressures. By contrast, some critics of the traditional approach, such as the United Nations’ Economic Commission on Africa (UNECA) in its “African Alternative Framework for Structural Adjustment Programmes” (UNECA, 1989), have identified exchange rate depreciations as a major factor.

Controversy between these two viewpoints has led to differing prescriptions about the appropriate policy response. Those focusing on monetary factors have emphasized reducing government budget deficits and restraining credit to public enterprises, while advocating exchange rate depreciation to offset any overvaluation resulting from past inflation and deterioration in the terms of trade. Those emphasizing the role of exchange rate depreciation, by comparison, have argued against further exchange rate adjustments, preferring instead a combination of incomes policies, price controls, and demand reduction measures.

Despite its importance, there has been surprisingly little research on the control of inflation in African countries. The few empirical studies on this issue have used traditional econometric techniques best suited to identifying whether individual variables are related to inflation. Thus, the relative importance of monetary policy in the control of inflation remains to be determined. It is on this background that this study would investigate the effectiveness of the monetary policy in combating inflation in Nigeria.

1.2 STATEMENT OF THE PROBLEM
Given the number of years since the Central Bank of Nigeria was established and the substantial financial resources and endowment available in the country, coupled with the existing institutions one will expect that the economy at large would have been well-established (Folawewo, etal., 2006). But one can claim that the entire spectrum of the economy has not been sufficiently active especially when compared with the economy of other developing countries.
Some of the problems that are identified for this include:-
1. Political problems in the country.
2. Poor implementation of past policies.
3. Insufficiency of database.
4. The ethical problem.

The main thrust of this study shall be to evaluate the effectiveness of the CBN’s monetary policy in controlling inflation over the years. This would go along way in assessing the extent to which the monetary policies have impacted on investment, savings and growth process in Nigeria.

1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to assess the effectiveness of the monetary policies in Nigeria. However, the following specific objectives would also be achieved.
(i) To discuss the causes and consequences of inflation in Nigeria;
(ii) To examine the trend in monetary policy and inflation in Nigeria over the years;
(iii) To empirically investigate the effectiveness of the monetary policy in controlling inflation in Nigeria

1.4 RESEARCH QUESTIONS AND HYPOTHESIS
This research shall be guided by the following research questions:
(i) What are the causes and consequences of inflation in Nigeria?
(ii) What has been the trend of monetary policy and inflation in Nigeria?
(iii) How effective has been the monetary policy in controlling inflation in Nigeria?

STATEMENT OF HYPOTHESIS
The hypothesis to be tested in the course of this research work is:
H0 - That the monetary policy instruments do not affect the
inflation rate in Nigeria.
H1 - That the monetary policy instruments affect inflation rate
in Nigeria.

1.5 RESEARCH METHODOLOGY AND SOURCES OF DATA
Secondary data would be used in this study. The relevant data to be used would be sourced from the Central Bank of Nigeria’s statistical reports, annual reports and statement of accounts for the years under review.

The Econometric approach that would be adopted to examine the effect of monetary policy instrument on inflation rate in Nigeria shall be the Ordinary Least Square (OLS) method. This econometric method would be used because it is very reliable and widely used in researches. Two multiple regression models shall be adopted to capture the effect of monetary policy on inflation rate in Nigeria. The impact of the selected monetary policy instruments on inflation shall cover the period between 1980 and 2005.

The test of the hypotheses earlier stated would be done at 5% level of significance and as such, the generalization of the study findings would be limited to this extent.

MODEL SPECIFICATION
MODEL 1
inf = a0 + a1M2 + a2Cr + Ui
Where inf - Inflation rate
M2 - Broad Money Supply
Cr - Cash ratio
a0, a1 and a2 - Parameters
Ui - Error term

MODEL II
inf = b0 + b1lr + b2Plr2 + Ui
Where inf - Inflation rate
lr - Liquidity Ratio
Plr - Prime lending rate
b0, b1 and b2 - Parameters
Ui - Error term

1.6 SCOPE OF THE STUDY
The economy is a large component with lot of diverse and sometimes complex parts. This study will focus on only one macroeconomic variable i.e inflation rate. This study will cover all the facets that make up the monetary policy, but shall empirically investigate the effect of the major ones. The empirical investigation of the impact of the monetary policy on inflation in Nigeria shall be restricted to the period between 1980 and 2005.

1.7 SIGNIFICANCE OF THE STUDY
This study is significance in the following ways:
1. It would provide an objective view of the effectiveness of the monetary policy in Nigeria;
2. The study would also provide an econometric basis upon which to examine the effect of monetary policy on inflation;
3. Lastly, it would provide policy recommendations to policy-makers on ways to combat price fluctuations through the monetary policy.

1.8 ORGANISATION OF THE STUDY
This research work shall be divided into five chapters. Chapter one shall provide a background of the subject matter justifying the need for the study. Chapter two shall present related literature concerning monetary policy and its impacts on inflation.

Chapter three shall discuss the trends in inflation, causes, consequences and government intervention in Nigeria. The research methodology and data analysis would be examined in chapter four. Concluding comments in chapter five shall reflect on limitations of the study and identify implications of the findings.




REFERENCES
Anyanwu J. C. (1996). “Monetary Economics: Theory, Policy and Institutions”. Hybrid publishers limited.

Batini, N. (2004). “Achieving and Maintaining Price Stability in Nigeria” IMF Working Paper WP/04/97, June.

Folawewo, A. O. and Osinubi, T. S. (2006). “Monetary Policy and Macroeconomic Instability in Nigeria: A Rational Expectation Approach”. Journal of Social Science, vol.12(2): pp.93-100.

Keywords: monetary policy, inflation rate