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Chapter one


1.1 Background of the Study

A country’s monetary policy is concerned with controlling the money stock (liquidity) and thus interest rates in order to influence macroeconomic variables such as inflation, employment, the balance of payments, and aggregate output in the desired direction.

There is no conventional or ideal structure for monetary policy targets and instruments; instead, the instrument varies each country, based on the size and stage of development of the financial sector.

Over the years, the goal of monetary policy has remained to achieve external balance. However, the emphasis on techniques/instruments to attain this goal has changed over time.

There have been two significant eras in the pursuit of monetary policy: before and after 1986. The first phase focused on direct monetary regulation, whereas the second focuses on market mechanisms.

Monetary policy prior to 1986 was characterised by the dominance of the oil sector, the growing importance of the public sector in the economy, and an overreliance on the external sector.

To maintain price stability and a healthy balance of payment position, monetary management relies on direct monetary instruments such as credit ceilings, selective credit controls, administered interest and exchange rates, as well as the perception of cash reserve requirements and special deposits.

The deployment of market-based instruments was not viable at the time due to the immature condition of the financial system and the purposeful constraint on interest rates.

The most popular monetary policy instrument was the credit rationing guideline, which established a primary rate of change for the component of commercial bank loans and advances to the private sector.

Globally, the problem of inflation is not unique to Nigeria; it is a problem that affects the majority, if not all, countries in the world. The Nigerian government’s attempt to achieve a better degree of economic development during this period often resulted in an inflationary spiral in the country.

However, it is unclear whether Nigeria’s inflation is caused by monetary mismanagement on the part of the authorities or by interest structural problems. Several variables have been recognised as contributing to the country’s inflationary pressures.

In a symposium on inflation in Nigeria conducted at the University of Ibadan in November 1983, the majority of participants emphasised the importance of money supply, the type of government expenditure constraints on real output, and inflation (imported) as important causes of inflation in Nigeria. When developing monetary policy, it is critical to identify objectives; however, it is impossible to measure performance.

Analysis of institutional growth and structure reveals that financial growth was rapid in the mid-1980s and 1990s. The number of commercial banks expanded from 34 to 64 in 1995 before declining to 51 in 1998, while the number of merchant banks increased only to 12 in 1986, 54 in 1991, and then 38.

In the network, the total number of commercial and merchant bank branches increased from 12,549 in 1996. There was also significant expansion in the number of non-financial entities, particularly insurance businesses.

Since 1986, the purpose of monetary policy has been the same: to stimulate output and employment while also promoting internal and external stability. In keeping with the structural adjustment program’s (SAP) overall economic management concept.

Monetary policy can be used to encourage investment and limit inflation, whilst fiscal policy can be used to reduce consumption of luxury and ostentation items. But our primary aim will be to investigate the effectiveness of monetary policy in reducing inflationary pressures in an economy like Nigeria.

Some economists argue that the effects of inflation are extremely detrimental to certain types of businesses. This could be because vendors frequently lose in the sense that the value of money falls short of its original purchasing power.

The following instances demonstrate the impact of inflation in Nigeria: It was 5.5 percent in 1985, representing a 20.1 percent annual growth from 40.9 percent in 1989.

It was accompanied by a high unemployment rate, which was at 4.3 percent in 1985 and 18.5 percent in 1989. As a result, Nigeria has been forced to implement a number of monetary policies in order to address the issue of inflation, as evidenced by rises in the cost of production during the relevant periods.

As a result of the foregoing, we want to implement some of the policy instrument mix used, as well as their effectiveness in terms of inflation control.

1.2 Statement of the Problem

Many attempts by Nigerian authorities to achieve better rates of economic growth and development have been accompanied by some degree of price increase in recent years, with the phenomena evolving into severe and persistent inflation and stagflation.

Indeed, it is increasingly recognised that a period of fast economic expansion is likely to result in inflationary pressure. However, whether the country’s inflation problem is caused by mishandling of monetary policy tools or structural inadequacies is still debated.

During the last decade, the impact of inflation and deflation on economic growth and development has been intensively debated. The problem is not limited to Nigeria, but has become a global phenomena.

Inflation is often recognised as a societal injustice. In addition, inflation has an impact on overall economic behaviour and resource allocation patterns. Prolonged inflation distorts price relations and undermines popular trust, slowing progress.

Furthermore, inflation discourages private savings and promotes speculation among different economic units. Another consequence is that it causes balance of payment issues and decreases the external valve.

Nigeria, as a market economy with national economic management strategies heavily influenced by Neo-classical and Keynesian perspectives, sought to decide on a solution to this problem by adopting the analysis and recommendations of these schools of thought.

Economic aggregates such as national income, savings, investment, and consumption expenditure have been experimented with to varying degrees in terms of taxes, public spending, savings campaigns, credit controls, wage adjustments, and all conceivable anti-inflation measures affecting the propensity to consume, save, and invest, which should all be determined at a general level.

All of the measures put in place thus far have proven insufficient in addressing the country’s inflation problem. The pain of the population is unending as everyday price surges occur. In order to discover a solution to the problem, this study seeks to find what control monetary policy has on inflation.

1.3 Objectives of the Study

It is vital to describe the primary goal of this research after identifying the current monetary policy instrument in Nigeria and some of the economic objectives that it is expected to effect.

These aims include:

1. Analyse the key sources of inflation in Nigeria throughout the 1980s.

2. To evaluate if Nigeria’s monetary policy is effective in achieving certain economic objectives, particularly inflation control.

3. Determine whether the failure to achieve the economic goal is attributable to the instrument used or its unsuitable use.

4. Recommend policy solutions based on the foregoing findings.

The policy advice based on the findings presented above will serve as a guide for future monetary policy implementation.

1.4 Statement of Hypothesis

The following hypothesis were developed based on the problem statement and the study’s goal.

1. Hypothesis 1: There is a positive and significant relationship between the money supply and the economy’s inflation rate.

HO: There is no positive or substantial relationship between the money supply and the inflation rate in the economy.

2. H1: There is an inverse and strong association between the inflation rate and economic growth.

HO: There is no inverse or substantial association between the inflation rate and economic growth.

1.5 Significance of the Study

Nigeria, like any other economy, has four basic goals: full employment, an equilibrium balance of payments, economic growth, and price stability.

The primary goal of this research is to determine the effectiveness of monetary policy in reducing inflation in Nigeria. The importance of this study to policymakers cannot be overstated in the economy, given the worrisome rate of inflation throughout the years, particularly in the 1990s.

This study will thus be extremely beneficial to policymakers, government and its agents, ministers of finance, investors (both international and indigenous), and the entire Nigerian population.

This study will also look into the different types of inflation, their causes and management methods, and how they affect Nigeria’s economic progress.

1.6 Scope of the Study

Because inflation occurs when aggregate demand exceeds aggregate supply, we will concentrate our efforts on evaluating the influence monetary policy has on these major factors.

This year span is 1984-1985. We will try to analyse the causes and effects of Nigerian inflation in terms of variables such as money supply, real production, and so on.

1.7 Limitations of Study

Our study’s limitations revolve around time, material availability, and financial constraints. The time limit for completing this research is somewhat more than three months.

Despite these limitations, the researcher made every effort to ensure the achievement of the research objectives.

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