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TOPIC : THE ROLE OF MONETARY POLICY IN CONTROLLING
NIGERIA (1980 – 2005)
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
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.
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
(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
QUESTIONS AND HYPOTHESIS
This research shall be guided by the following research
(i) What are the causes and consequences of inflation
(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
inflation rate in Nigeria.
H1 - That the monetary policy instruments affect inflation
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
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
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.
inf = a0 + a1M2 + a2Cr + Ui
Where inf - Inflation rate
M2 - Broad Money Supply
Cr - Cash ratio
a0, a1 and a2 - Parameters
Ui - Error term
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
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
3. Lastly, it would provide policy recommendations to
policy-makers on ways to combat price fluctuations through
the monetary policy.
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.
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.
O. and Osinubi, T. S. (2006). “Monetary Policy
and Macroeconomic Instability in Nigeria: A Rational
Expectation Approach”. Journal of Social Science,
Regression Data and Results are included
policy, inflation rate