CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

A country’s monetary policy is concerned with maintaining control over its money supply (liquidity) and therefore interest rate in order to influence macroeconomic variables such as inflation, employment, balance of payments, and aggregate output in the desired direction. The instrument varies from country to country, depending on the size and stage of development of the financial sector. There is no standard or ideal structure for monetary policy aim and instrument.

The goal of monetary policy has remained the same over time: to achieve external balance. However, the emphasis on techniques/instruments to attain this goal has shifted over time. Before and after 1986, there were two key eras in the pursuit of monetary policy. The direct monetary control was the focus of the first phase.

A country’s monetary policy is concerned with maintaining control over its money supply (liquidity) and therefore interest rate in order to influence macroeconomic variables such as inflation, employment, balance of payments, and aggregate output in the desired direction. The instrument varies from country to country, depending on the size and stage of development of the financial sector. There is no standard or ideal structure for monetary policy aim and instrument.

The goal of monetary policy has remained the same over time: to achieve external balance. However, the emphasis on techniques/instruments to attain this goal has shifted over time. Before and after 1986, there were two key eras in the pursuit of monetary policy. The direct monetary control was the focus of the first phase.

The most widely used monetary policy tool was the credit rationing insurance policy, 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 on the planet. At this time, the Nigerian government’s desire to achieve a higher degree of economic development has often resulted in an inflationary spiral in the country.

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

Most of the participants in a symposium on inflation in Nigeria held at the University of Ibadan in November 1983 emphasized money supply, nature of government expenditure constraints in real production, and inflation (imported) as the key sources of inflation in Nigeria. It is critical to identify objectives when formulating monetary policy, but it is also impossible to measure performance.

Financial growth accelerated in the mid-1980s and 1990s, according to an examination of institutional expansion and structure. Commercial banks increased from 34 to 64 in 1995, then declined to 51 in 1998, whereas merchant banks increased from 12 in 1986 to 54 in 1991, then down to 38 in 1998.

Since 1986, the goal of monetary policy has remained the same as it had been previously: to stimulate output and employment while also promoting domestic and international stability. In keeping with the basic economic management concept under the structural adjustment program (SAP). Fiscal policy can be used to reduce consumption of luxury and ostentation products, while monetary policy can be used to encourage investment and control inflation. Our main aim, however, will be to investigate the effectiveness of monetary policy in reducing inflationary pressure in a country like Nigeria.

Some economists argue that inflationary effects are particularly destructive to some commercial establishments.

The following examples demonstrate the magnitude of the impact of inflation in Nigeria: It was 5.5 percent in 1985, up from 40.9 percent in 1989, suggesting a 20.1 percent yearly percentage rise.

It was followed by a high unemployment rate, which peaked at 4.3 percent in 1985 and 18.5 percent in 1989. As a result, Nigeria has been forced to adopt several monetary measures to combat inflation, as evidenced by the associated increases in the cost of production during the periods under consideration.

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

 STATEMENT OF THE PROBLEM

In recent years, several attempts by Nigerian authorities to achieve better rates of economic growth and development have often been accompanied by some degree of price increase, a phenomena that has evolved into many and extended inflation and stag inflation. Indeed, it is becoming increasingly clear that high economic expansion is likely to result in inflationary pressures. However, whether the country’s inflation problem is caused by mishandling of monetary policy tools or structural flaws is still a point of contention.

The impact of inflation and deflation on economic growth and development has been extensively explored throughout the previous decade. The problem is not exclusive to Nigeria; it has become a worldwide phenomena. Inflation also inhibits individual saving and fosters speculation among different economic units. Another effect is that it causes problems with the balance of payments and decreases the external valve. Because Nigeria is a market economy, its national economic management techniques are heavily shaped by Neo-classical and Keynesian persuasions. As a result, the analyses and recommendations of these schools of thought have been adopted to find a solution to this problem.

National income, savings, investment, and consumption expenditure have all been subjected to varying degrees of experimentation with regard to taxes, public expenditure, savings campaigns, credit controls, wage adjustments, and all other conceivable anti-inflation measures affecting the propensities to consume, save, and invest, which should all be combined to determine the overall level.

All of the measures taken so far have failed to address the country’s inflation problem. As daily price surges occur, the suffering of the masses is unending, and more research is needed to find a solution to the problem. As a result, this study aims to determine what control monetary policy has over inflation.

National income, savings, investment, and consumption expenditure have all been subjected to varying degrees of experimentation with regard to taxes, public expenditure, savings campaigns, credit controls, wage adjustments, and all other conceivable anti-inflation measures affecting the propensities to consume, save, and invest, which should all be combined to determine the overall level.

All of the measures taken so far have failed to address the country’s inflation problem. As daily price surges occur, the suffering of the masses is unending, and more research is needed to find a solution to the problem. As a result, this study aims to determine what control monetary policy has over inflation.

 OBJECTIVE OF THE STUDY

After identifying the ruling monetary policy tool in Nigeria and some of the economic objectives that they are intended to effect, it is vital to define the major goal of this study.

These goals include the following:

1. to look into the main reasons of inflation in Nigeria in the 1980s.

2. To determine whether Nigeria’s monetary policy is effective in achieving certain economic goals, including inflation control in particular.

3. To see if the non-realization of the economic objective is due to chosen instrument or inappropriate application of the instrument.

4. To make policy recommendations based on the foregoing findings.

The policy advice based on the aforementioned findings will serve as a roadmap for future monetary policy implementation.

 STATEMENT OF HYPOTHESIS

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

1. H1: The stock of money supply and the rate of inflation in the economy have a positive and significant relationship.

HO: The stock of money supply and the rate of inflation in the economy have no positive and substantial relationship.

2. H1: The rate of inflation and economic growth have an inverse and significant relationship.

HO: Inflationary rate and economic growth have no inverse and substantial link.

 SIGNIFICANCE OF THE STUDY

The four fundamental goals of any economy, including Nigeria’s, are 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 in the economy cannot be overstated, especially given the frightening pace of inflation increase throughout the years, particularly in the 1990s.

As a result, policymakers, government and IT agents, finance ministers, investors – both international and indigenous – and the entire Nigerian population will benefit greatly from this study.

This research will also look into the different types of inflation, their origins and management methods, as well as their impact on economic development.

SCOPE OF THE STUDY

Because inflation occurs when aggregate demand exceeds aggregate supply, we will examine the influence of monetary policy on these fundamental variables.

The years 1984 to 1985 are used in this example. We will attempt to assess the causes and effects of Nigerian inflation in terms of variables such as money supply, real production, and so on.

LIMITATION OF STUDY

Time, material availability, and financial constraints all played a role in our research. This study has a time limit of just over three months to complete.

Despite these limitations, the researcher has taken every effort to guarantee that the research objectives are met.

The purpose of this information is to serve as a GUIDE for pupils.

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