Full Project- EFFICIENCY OF MONETARY POLICY IN CONTROLLING INFLATION IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND OF THE STUDY

In Nigeria, the central bank is at the apex of the banking pyramids, applies a variety of policy measure and techniques to control and regulate money and credit in order to attain the desired economic goals or objectives. It is therefore necessary and important to use the package of monetary policy measures as basis for discussing the efficiency or otherwise of general economic management strategies. Government policy statements clearly reveal that inflation became a problem in Nigeria about the early 1970’s. This contention can be substantiated from the fact that the economy began to experience double digit rate of inflation from early part of the decade.
The problem of the inflation is not peculiar to Nigeria, but it is a global problem confronting the majority; if not all countries of the world. The attempt by the Nigeria government to attain a higher level of an economic development at this period, generally led to spiral inflation in the country. But whether inflation in Nigeria is due to monetary mismanagement on the part of the authorities concerned or came by inherent structural deficiencies, still remains uncertain. Many factors have been identified to be responsible for inflationary pressure in the country. In the process of formulating monetary policies, it is paramount important to specify objectives and also impossible to evaluate performance. Government policies are to achieve certain objective which include price stability, high rate of economic growth and balance of payment equilibrium. Monetary policy can be employed in encouraging investment and controlling inflation while fiscal policy can be effective in reducing consumption of luxury and ostentatious goods. But the major concern of this project is to explore the effectiveness of monetary policy in controlling inflationary pressure in an economy like Nigeria.
It is generally believed by some economists that inflationary effects are quite harmful to some business establishments. This could be so because vendors often loss in the sense that the value of their money falls short of its original purchasing power. The extent of the effect of inflation in Nigeria has forced Nigeria to adopt several monetary policy measures within. However these policy measures have not solved the problem of inflation as could be seen for the associated increase in the cost of production during the period under consideration. It is therefore in view of the above that it becomes necessary to example some of the mixed policy instruments used and hence their efficiency as regards inflationary control. The problems of inflation in reflection to economic growth and development have been extensively discussed. The problem is.
1.1     STATEMENT OF PROBLEM
The problem this study attempts to address is to evaluate the efficiency of monetary policy in controlling inflation in Nigeria. Also without this study it will be impossible to determine whether monetary policy is efficient in controlling and bringing down inflation to the nearest minimum and to achieve its original objectives. This piece also do expand and enrich available literature and could provide opportunity for general statement monetary the performance of effective monetary policy in Nigeria. Studies on the performance of monetary policy in Nigeria and monetary policy programme in general are emerging from the favoured countries. Steven’s (1992) asserts that abundant evidence is available to support that inflation is a big problem affecting Nigeria economic development. However, according to him some empirical evidence are not entirely clear in the support of the assertion, evidence from less favoured economic environment like Nigeria are either non existence or very scanty and untested. Hence, the precise performance of monetary policy can hardly be presently generated. Not peculiar to Nigerian but has assumed a global phenomenon. These problems are how: –
1.     To identify the policy instruments use in controlling inflation in Nigeria.
2.     To find out who is responsible for introducing and enforcing the policies.
3.     To appraise their efficiency since inflation started.
4.     To find out which method that will help stop monetary mismanagement as it affects inflation. These problems listed out are major problems that should be looked into
1.2     OBJECTIVES OF THE RESEARCH
It is necessary to state the primary objective of this research having identified the ruling monetary policy instruments in Nigeria and the economic objective that these are expected to influence. These are as follows: –
1.    This work is set out to investigate the cause of inflation in Nigeria
2. To investigate if Nigerian momentary policy is efficient or not, in the achievement of certain objective of the economy and inflationary control in particular.
3.    To see it the non-realization of the economic objective is due to choice of wrong instrument or inappropriate application of the instruments.
4.    To recommend policy solutions based on the research findings the policy recommendations based on such findings will then serve as a guide to the further application of monetary policies.
1.3     RESEARCH QUESTIONS
The following questions are relevant to the research;
1. What are the causes of inflation?
2.       What are consequences of inflation?
3. Does inflation have any effect on income?
4.   Does the level of money stock influence inflationary rate?
5.   Can economic growth be constant during inflationary periods?
6.       Does inflation hamper economic growth?
7.       Can monetary policy measure control inflation?
8. How can inflation be controlled if not estimated?
1.4     HYPOTHESIS
Based on the problem, statement and purpose of study, the following hypotheses were formulated:
H0:    There is a significant relationship between the money supply and inflationary rate in the economy
H0:    There is a significant relationship between economic growth and inflationary rate in the economy.
Hi:     There is no significant relationship between the money supply and inflationary rate in the economy.
Hi:     There is no significant relationship between economic growth.
1.5     DEFINITION OF TERMS
The operational terms are defined to help the reader have a better understanding of the subject matter of the researcher.
Monetary Policy: This consists of government action in achieving a certain set of economic objective.
Policy: A statement including objectives to be attained; It may include proportion in the use of the means to obtain these objectives. Fiscal Policy: It is a government policy that concerns revenue and taxation.
Inflation: It is the period of general rise in price level of all goods and or service. It can simply be understood as when few goods are in existence more than money or more money chasing few goods.
Cost-Push Inflation: It is condition of general rise in price caused by production cost.
Demand-Pull Inflation: It is a condition of general rise in price caused by increase in aggregate demand.
Hyper Inflation: It is a situation in which prices are rising, with little or no increase in output.
Stagflation: It is a high rate of inflation associated with industrial inactivity and high rate unemployment.
Discount Window Operation: A policy instruments to signal the desired direction of interest rates by CBN and in accordance with its role as tender of last resort.
Gross Domestic Product (GDP) It is the aggregate value of goods and services produced within a nation or area.
Monetary Supply (MS) Monetary supply known as (M1) is used for the purpose of this research and is defined as the currency with the non-bank public plus private sector demand deposits. The other definition of money supply (M2) is that which incorporates both precautionary demand and store of value in M1.
General Price Level The overall prices of goods and services usually measures with consumer price index (CPI). The CP1 measure the rise or fall in the general price level.
Central Bank of Nigeria This is the highest monetary authority in Nigeria charged with responsibility for the production and issuance of legal tender currency in Nigeria, maintenance of external reserves in order to safeguard the international value of the currency. The promotion of monetary stability and sound financial structures, bankers and financial adviser to the federal government; and banker to other bankers in Nigeria.
Balance of Payment: This is a double entry statement of account which reveals the direction to various transactions in goods, services and capital flows between residents of one country and those of the rest of the world.
Efficiency: This is the ability of Nigerian monetary policy to achieve the desire macro economic objectives in general and to control inflation in particular. Full employment, equilibrium in balance of payment, economic growth and price stability are the four primary goals of any economy of which Nigeria is not an exception. The findings and recommendation of this project will go a long way in addressing the problems of inflation in this country. The important of this study to policy maker can not therefore be over emphasized considering the alarming rate of rise in inflation over the years especially in 90s The result of this study based on the examination of the types of inflation, causes and ways of controlling its impact on economic development will be of immense help to policy makers; government and its agencies, minister of finance, investors both foreign and indigenous; and the entire Nigeria public.

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