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PROJECT TOPIC  : THE ROLE OF MONETARY POLICY IN CONTROLLING INFLATION IN NIGERIA (1980 – 2014)

PROJECT PROPOSAL

BACKGROUND OF THE STUDY
Inflation has become a significant problem for Africa and Nigeria in particular during the past thirty 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.

It has been argued that inflation distorts prices, diverts capital to rent seeking activities, compounds social and political problems, frustrates economic planning, encourages capital flight, discourages savings, reduces investment, retards economic growth and development, serves as tax on the poor and ultimately, reduces the living conditions of the people (Safdari et al 2011; Salam et al 2006; Badreldin 2014). In order to avert these ills, monetary authorities all over the world have made conscious efforts to achieve low and stable inflation rates, using one form of monetary policy framework or the other. According to Borio (2014), this means leaning more deliberately against booms and easing less aggressively and persistently during busts. Among the various monetary policy frameworks so far in use include exchange rate targeting, interest rate targeting, monetary targeting and recently the inflation targeting (Ojo, 2013).

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.

STATEMENT OF THE PROBLEM
The primary objective of monetary policy in Nigeria is price stability. But despite the various monetary regimes that have been adopted by the Central Bank of Nigeria over the years, inflation still remains a major threat to Nigeria’s economic growth.

Although the inflation rate has been relatively kept low in recent years, Nigeria’s experience of inflation is nothing good to write home about. Nigeria has experienced high volatility in inflation rates. Oyakhilomen and Rekwot (2014) traced the history of inflation in Nigeria to the 1960s when “cheap money policy” was adopted by the government to stimulate development after independence. Since the early 1970’s, there have been four major episodes of high inflation, in excess of 30 percent (CBN, 2009). The growth of money supply is correlated with the high inflation episodes because money growth was often in excess of real economic growth. However, preceding the growth in money supply, some factors reflecting the structural characteristics of the economy are observable. Some of these are supply shocks, arising from factors such as famine, currency devaluation and changes in terms of trade.

Structural factors have proven to be important in the inflation spiral. Reduction in oil revenue (a supply shock) led to a reduction in real income, with serious distributional implications. As workers pushed for higher nominal wages, while producers increased mark-ups on costs, an inflationary spiral followed. In addition to these factors the government also had a transfer problem in order to meet debt obligations.

The failure of the monetary policy in curbing price instability has caused growth instability as Nigeria’s record of development has been very poor. In marked contrast to most developing countries, its GDP was not significantly higher in the year 2000 that it was 35 years before. As many economic indicators show, Nigeria’s economy has experienced different growth stages. The GDP growth rate recorded negative growth in the early 1980s (-2.7 in 1982, 7.1 in 1983 and -1.1 in 1984). The growth rate increased steadily between 1985 and 1990 but fell sharply in 1986 and 1987 to 2.5% and -0.2%. Except in 1991 when a negative growth rate of -0.8% was recorded, 1990s witnessed an unstable growth. However, the growth rate has been relatively high since 2001. An examination of the long-term pattern reveals the following secular swings: 1965-1968 Rapid Decline (civil war years), 1969-1971 Revival, 1972-1980 Boom, 1981-1984 Crash, 1985-1991 Renewed Growth, 1992-2014 Wobbling.

The main thrust of this study is to evaluate the effectiveness of the CBN’s monetary policy in combating inflation over the years. This would go along way in assessing the extent to which the monetary policies have been effective.

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

RESEARCH QUESTIONS AND HYPOTHESIS
This research shall be guided by the following research questions:
(i) What has been the trend and structure of monetary policy in Nigeria over the years?
(ii) What is the trend of inflation in Nigeria?
(iii) How has been the performance of the monetary policy in Nigeria over the years?
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.

RESEARCH METHODOLOGY
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 2014.

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

SCOPE OF THE STUDY
The economy is a large component with lot of diverse and sometimes complex parts. This study focuses on only two macroeconomic variables i.e monetary policy and inflation. This study covers all the facets that make up the monetary policy, but shall empirically investigate the effect of the major ones. The empirical investigation of the effectiveness of monetary policy in controlling inflation in Nigeria shall be restricted to the period between 1980 and 2014.

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.

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 inflation. Chapter three shall explain the research methodology to be adopted while chapter will focus on presentation of data and analyses. Concluding comments in chapter five shall reflect on implications of the findings.



REFERENCES

Batini, N. (2004) “Achieving and Maintaining Price Stability in Nigeria”. IMF Working Paper. No. WP/04/97, June.
Badreldin, M. A. (2014) “Inflation and Economic Performance in Sudan: An Analysis Study”. Researchjournali’s Journal of Economics. Vol. 2, no. 3, pp. 1-8.
Borio, C. (2014) “Monetary policy and financial stability: what role in prevention and recovery?” Bank for International Settlements (BIS) Working Papers. No 440, pp. 1-23.
Ojo, M. (2013) “Transition to Full-Fledged Inflation Targeting: A Proposed Programme for Implementation by the Central Bank of Nigeria”. Central Bank of Nigeria Occasional Paper. No. 44, pp. 1-84.
Oyakhilomen, O. and Rekwot, G. Z. (2014) “The Relationships of Inflationary Trend, Agricultural Productivity and Economic Growth in Nigeria”. Central Bank of Nigeria (CBN) Journal of Applied Statistics. Vol. 5, no. 1, pp. 35-47.
Safdari, M., Abouie, M. M. and Elahi, M. (2011) “Investigating the Roots of Inflation in Iran”. International Research Journal of Finance and Economics. Issue 72, pp. 7-13.
Salam, M. A., Salam, S. and Feridun M. (2006) “Forecasting Inflation in Developing Nations: The Case of Pakistan”. International Research Journal of Finance and Economics. Issue 3, pp. 138-159.

 

 

PROJECT PROPERTIES
Project Status
Available
Number of Chapters
5
Number of Pages
126
Number of Words
20,968
Number of References
77
Project Level
B.Sc.
Price
N10,000 (Non-Negotiable)
Abstract, Regression Data and Results are included
How to Pay for this Project . . . .CLICK HERE

Keywords: monetary policy, inflation rate

 

 

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