The Effectiveness of Monetary Policy in Controlling Inflation in Nigeria.

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ABSTRACT This paper investigated the effectiveness of monetary policy in controlling inflation in Nigeria using secondary annual data spanning from 1981 to 2019. Money Supply, Treasury bills rate, monetary policy rate and exchange rate were the variables used in the study to check inflation. The paper employed cointegration method to check for the long run relationship between the variables, Augmented Dickey Fuller unit root test to check if the variables are stationary or nonstationary, Granger causality test to know if the variables are uni-directional, bi-directional or have no causal relationship and Ordinary Least Square (OLS) was adopted because of its property of Best Linear Unbiased Estimator. The study commenced with the analysis of testing the variables of interest using Augmented Dickey Fuller (ADF) unit root test and the result indicates that the variables were non-stationary at level but was stationary at first differences. The Johansen cointegration test revealed the existence of long-run relationship between the variables. While the empirical result of the OLS test showed that monetary policy rate, money supply and treasury bill rates exert positive influence on inflation in Nigeria. While exchange rate depreciation leads to inflationary growth. This result is consistent with the prediction of economic theory. The study therefore concluded that money supply, treasury bills rate, monetary policy and exchange rate had influence on inflation within the period under consideration and recommends that since open market operation using annual Treasury bill rate as proxy has not been effective in managing inflation; therefore, schemes to make it more effective should be adopted perhaps by offering competitive rates and the monetary authority should re-assess the effectiveness of monetary policy rate given its ineffectiveness as a tool to manage inflation in Nigeria during the period.

CHAPTER ONE INTRODUCTION 1.1 BACKGROUND TO THE STUDY Monetary policy is the action taken by the monetary authority (Central Bank) to control the supply of money in the country, with the objective of promoting price stability and economic growth. The connection between money in circulation and inflationary rate are the main indicator for the measurement of an economy’s prosperity, performance and growth abilities. The regulation of the volume of money in circulation and maintaining price stability has been one of the main objectives of emerging nations such as Nigeria. Monetarist economist has maintained that there is an indicating relationship between inflation and money supply and uncontrollable increase in the volume of money may have adverse effect on economic condition (Chaudhry, Ismail, Farooq & Murtaza, 2015). The key target of Nigerian policy architects is to ensure price stability and maintain inflation rate at single digit. They try to achieve this through the manipulation of monetary policy instruments so as to ensure a stable and strong financial system and enhance economic growth. In regards to this, Fabian and Charles (2014) opined that monetary policy is one of the major tools hired by Central Bank of Nigeria (CBN) to regulate financial activities through the control of monetary policy rate (MPR), introduced towards the end of 2006 to influence the level of economic activities in the money market.


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APA

Frontiers, E. (2022). The Effectiveness of Monetary Policy in Controlling Inflation in Nigeria.. Afribary. Retrieved from https://afribary.com/works/the-effectiveness-of-monetary-policy-in-controlling-inflation-in-nigeria-5932

MLA 8th

Frontiers, Edu "The Effectiveness of Monetary Policy in Controlling Inflation in Nigeria." Afribary. Afribary, 28 Aug. 2022, https://afribary.com/works/the-effectiveness-of-monetary-policy-in-controlling-inflation-in-nigeria-5932. Accessed 28 Mar. 2024.

MLA7

Frontiers, Edu . "The Effectiveness of Monetary Policy in Controlling Inflation in Nigeria.". Afribary, Afribary, 28 Aug. 2022. Web. 28 Mar. 2024. < https://afribary.com/works/the-effectiveness-of-monetary-policy-in-controlling-inflation-in-nigeria-5932 >.

Chicago

Frontiers, Edu . "The Effectiveness of Monetary Policy in Controlling Inflation in Nigeria." Afribary (2022). Accessed March 28, 2024. https://afribary.com/works/the-effectiveness-of-monetary-policy-in-controlling-inflation-in-nigeria-5932