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TOPIC : THE ROLE OF MONETARY POLICY IN CONTROLLING INFLATION IN
NIGERIA (1980– 2016)
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
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,
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.
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 (Akinjare
et al., 2016).
Although the inflation rate has been relatively kept
low in recent years before slipping into recession in
2016, 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 (Ujuju and
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. For instance,
the historic change in the monetary policy of the Fed
in the United States coupled with the crash of crude
oil price at the international oil market in 2014-2016
did not only caused fiscal imbalance in Nigeria, it
destructed business and economic activities in the country
forcing the economy to slip into its first recession
in twenty-five years. Nigeria’s inflation rate
increased by about 91% from 9.7% in October 2015 to
17.78% in February 2017. While Year-on-Year inflation
rates increased by 55% between February 2016 to February
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
until mid 2014 when it began to fall from 6.54% in 2014Q2
(CBN, 2015) to -0.36% in 2016Q1 (NBS, 2016a), and then
to -2.06 in 2016Q2 (NBS, 2016b), and further down to
-2.24 in 2016Q3 (NBS, 2016c) due to oil price crash.
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, 1992-2013 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
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 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
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.
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
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
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 2016.
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 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.
Akinjare, V.; Babajide, A. A.; Isibor, A. A.
and Okafor, T. (2016) “Monetary Policy and its
Effectiveness on Economic Development in Nigeria”.
International Business Management. Vol. 10,
no. 22, pp. 5336–5340.
Batini, N. (2004) “Achieving and Maintaining Price
Stability in Nigeria”. IMF Working Paper. No.
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.
Central Bank of Nigeria (2015) Statistical Bulletin.
Abuja: Central Bank of Nigeria.
National Bureau of Statistics (2016a) Nigerian Gross
Domestic Product Report, Quarter One. Issue 09, pp.
National Bureau of Statistics (2016b) Nigerian Gross
Domestic Product Report, Quarter Two. Issue 10, pp.
National Bureau of Statistics (2016c) Nigerian Gross
Domestic Product Report, Quarter Three. Issue 11, pp.
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.
Ujuju L. E. and Oshiobugie B. O. (2017) “Inflation
management and the usage of monetary policy instruments
in Nigeria (1975-2014)”. International Journal
of Current Innovation Research. Vol. 3, iss. 11,
- Fifteen Thousand Naira (Non-Negotiable)
Regression Data and Results are included
policy, inflation rate
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