Format: Ms-Word   Chapters: 1 - 5

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 Amount: 3,000

 Feb 28, 2019 |  10:49 am |  36

1.1 Background To The Study 
Reduction of inflation has become one of the most desirable objectives of macroeconomic management. Economists all over the world are unanimous in their affirmation of this position. This is because, frequent price fluctuations, whether persistent increase (inflation) or decrease (deflation), create risks and uncertainties in an economic environment. Fielding (2008) reveals that price instability creates uncertainties about future prices, increases business risks and unanticipated changes in the distribution of wealth. It is important to know that, risks and uncertainties make planning by both consumers and producers difficult, by implication, lead to a fall in the efficiency of the free market in allocating scarce resources and solving other societal and/or economic problems. Whenever prices rise above interest rate on savings, savings is discouraged. This however led to a fall in loanable funds for investment, and consequently, a fall in potential output and employment. Interestingly, steady and gradual changes in the price level also come with some desired implications. Chiefly among these is its ability to serve as impetus for growth if properly controlled. 
There is a general believe that at least 3 percent steady growth in the price level in an economy would help boost economic growth. This position is based on the premise that investors are motivated to commit their scarce resources into production of goods and services when they expect a steady rise in the prices of these goods and services. On the other hand, deflation benefits the consumers. It increases their level of demand and consumption and, as a result, increases their standard of living. However, as rightly opined by Berlemann and Nelson(2002), the negative distributional and allocative effects of price instability are typically supposed to dominate the positiveenes. There is therefore a need to stabilize prices in such a way that it retains its powers to boost economic growth and employment while ensuring it does not create market risks and uncertainties. This has been the target of fiscal and monetary policy instruments which have been jointly administered by most economies today in promoting the macroeconomic goal of price stability.
The Nigerian economic environment is experiencing its own unfortunate share of uncontrollable price fluctuations. Till date, inflation continues to be one of the most challenging of all the numerous economic problems faced by the Nigerian economy.( Kumapayi, Nanaand Ohwofasa, 2012) attributed Nigeria’s inflation problem to the oil boom of 1970s, and the rise in government expenditure in the wake of the government’s determination to enhance post-civil war reconstruction and development.The implication was a rise in domestic money supply without a corresponding increase in domestic production of goods and services. This adversely affects funds mobilization and disbursement for investment, thereby adversely affecting output and employment. This result is an uncontrollable rise in domestic prices of goods and services. Current available economic indicators, which present her as a poverty engulfed country and an unfavourable businesss environment, point to this fact. Policy implementations which seek to address Nigeria’s inflation problem, by successive governments, can be grouped under fiscal and monetary policy. However, over the years, undue reliance has been placed on fiscal policy rather than monetary policy with very little satisfactory results (Darrat,1984).There was therefore the need to restructure the money market in order to enhance the role of monetary policy instruments in macroeconomic management in Nigeria. This was the core of the financial sector liberalization (deregulation) exercise which came under the auspices of the Structural Adjustment Programme (SAP) of 1986 (Ajisafe, 2002). 
Prior to the deregulation exercise, the financial sector operated under financial regulations and interest rates were said to be repressed. Ceilings were imposed on deposit and lend ingnominal interest rates. The pre-reform period (1960-1986) is considered a period of financial repression and was characterized by a highly regulated monetary policy environment in which policies of directed credits, interest rate ceiling and restrictive monetary expansion were the rule rather than exception (Soyibo and Olayiwola, 2000). The financial liberalization exercise was aimed at enhancing the development of the money market, there by laying a foundation for proper monetary policy implementation. This, it was hoped, would help control money supply and consequently, control inflation. The functions of the Central Bank, as the apex of the money market, were also boosted. According to Iyaji et al. (2012), the Central Bank of Nigeria (CBN) was to implements policies through Deposit Money Banks (DMBs) that guarantee the orderly development of the economy through changes in money supply. The target was to control inflation at a rate which would not negate the objectives of economic growth and employment.
For years, the Nigerian economy faced socio-economic stagnations traceable to inflationary spiral, particularly in the 1970s when inflation increased to a double digit. It has been accompanied with high level of unemployment rate at 4.3% in 1985 and 18.5% in 1986. This has forced Nigeria to adopt several monetary measures within and the problem of inflation as could be seen from the associated increases in the cost of production during the periods under consideration.
The analysis of the non-core inflation in the early1990s reveals inflation rate of 63.6% in late1994. Headline inflation rose rapidly by 1995 to reach an all-time high of 72.8%, though it decelerated gradually to a single digit in 1997. In the same vein, core inflation, which began a gradual ascent in early 1990, peaked at about 69.0% in the mid-1995 before slowing down in 1997. Since, then inflation remained at single digits between 1998 and 2001. In 2003, macroeconomic stability was restored, following the gains of a comprehensive and consistent economic reform program. The low inflation rate regime did not last for too long with the resurgence of spikes in headline and core-inflation between 2000 and 2001. Headline inflation rate remained at double digits between 2002 and 2005 as it recorded 12.9%, 14%, 15%, and 17.9% in the respective years. However, it decelerated dramatically to 8.24% and 5.38% in 2006 and 2007 before rising astronomically to 11.60% and 12.00% in 2008 and 2009 in that order, although fell marginally to 11.8% and 12.3% in 2010 and 2013 respectively.(CBN,2014).
In December 2015, the Bureau of Statistics (NBS) said the inflation rate rose to 9.8% compared to the 9.4% inflation rate in November of the same year. Contrary to expectations, the Consumer Price Index (CPI) which measures inflation, increased by 18.55% (year-on-year) in December 2016, 0.07% age points higher from the 18.48% recorded in November 2016. This is an 11-year high record corresponding with the rate as at November 2005. (NBS, 2017). This study therefore intends to empirically investigate the impact of monetary policy on the inflation rate in Nigeria.

1.2 Statement of the Problem
Many attempts being made by the Nigeria authorities to attain higher rate of economic growth and development have generally been accompanied by certain degrees of price increase in recent years, the phenomenon developed into several and prolonged inflation and stag inflation. Indeed, it is increasingly being recognizes that a process of rapid economic growth is likely to provoke inflationary pressures. However, whether the problem of inflation in this country is due to mismanagement of monetary policy tools or structural deficiencies still remain a controversial matter.
During the last decade the problem of inflation to economic growth and development have been extensively discussed. The problem is not peculiar to Nigeria but has assumed a global phenomenon. It is generally agreed worldwide that inflation is socially unjust. Inflation also affects general economic behavior and the pattern of resource allocation. By distorting price relations and undermining general confidence and thus slackens growth.
Furthermore, inflation discourages private saving and encourages speculation among the various economic units. Another consequence is that it result to balance of payment difficulties. Nigeria being a market economy and therefore having its national economic management strategies largely informed by Neo-classical and Keynesian persuasions have sought over the decade for the solution to this problem through the adoption of the analysis and recommendation of these school of thoughts.
All the measure so far adopted were  inadequate in solving the problem of inflation in the country. It is worrisome of fact that despite the Central Bank of Nigeria's conscious effort in trying to control inflation in Nigeria using its various monetary policy instruments, the inflation rate still remain debilitating, it is therefore against these problems that the researcher seeks to investigate the impact of monetary policy on inflation rates in Nigeria.

1.3 Research Questions
The researcher seeks to investigate the impact of monetary policyon inflation rate in Nigeria and therefore intends to find answers to the following questions:
How does interest rate affect inflation rate in Nigeria?
What impact does liquidity ratio has on inflation rate in Nigeria?
How does cash reserve ratio affect inflation rate in Nigeria?

1.4.    Objectives of the Study
The broad objective of this research work is to investigate the impact of monetary policy on inflation rate in Nigeria.
Below are the specific objectives:
To investigate the impact of interest rate on inflation rate in Nigeria.
To determine the impact of liquidity ratio on inflation rate in Nigeria.
To determine the effect of cash reserve ratio on inflation rate in Nigeria.

1.5 Research Hypotheses
The researcher seeks to test the following hypotheses in the course of this study
Hypothesis one
H0: Money policy instruments  have no significant impact on inflation rate in Nigeria.
H1: Money policy instruments have a significant impact on inflation rate in the Nigeria.

1.6 Significance of the Study
The aim of every government is to maintain price stability by controlling inflation rate, this is because of the multiplier effect it has on the economy. The researcher seeks to investigate the impact of monetary policy on inflation rate in Nigeria.
This study will be of immense significance as it will help the policy makers, government as well as its agencies, minister of finance, investors – both foreign, indigenous and the entire Nigerian populace.
This study will also examine the types of inflation, causes and ways of controlling it and the impact on the economic development of Nigeria.
Finally, this study will be of immense help as its findings will add to the existing body of knowledge and will also provide basis for future researches on monetary policy and inflation rate in Nigeria.

1.7 Scope and Limitations of the Study
This study seeks to investigate the impact of monetary policy on inflation rate in Nigeria and it aims to study the impact of monetary policy instruments on inflation rate over the period of 32 years i.e from 1986 to 2017 . This scope is chosen in order to capture the impact of variables like money supply and interest rate on inflation rate after the Structural Adjustment Programme in Nigeria.
The researcher is constrained by time as well as financial and material resources required in accomplishing the project.
Inspite of these limitations, the researcher has made conscious effort to ensure the realization of the research objectives.  

1.8. Organization of the Study
This study is divided into five chapters.
Chapter one contains the general introduction which provides the background to the study, statement of the problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study and organization of the study. Chapter two examines the works of other economists on the subject matter of monetary policy and inflation rate and it consists of definition of concepts, theoretical literature review, empirical literature review, theoretical framework and literature gaps. Chapter three provides the methodology employed. It also contains the specification and estimation of the model. Chapter four carries out the analysis and interpretation of the result as well as the policy implication of the findings. Chapter five contains the summary, conclusion and recommendations.

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