Effect of Monetary Policy on Inflation and Money Supply in Nigeria
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– Effect of Monetary Policy on Inflation and Money Supply in Nigeria –

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Abstract

The major objective of this study is to analyze the effect of monetary policy on inflation and money supply in Nigeria within the period of 1986-2016.

Specifically, we examined the effect of the exchange rate, interest rate, and net domestic credit on the statutory liquidity ratio in Nigeria, as well as determined the effect of the exchange rate, interest rate, and net domestic credit on cash reserve ratio in Nigeria.

Data were collected through secondary sources mainly from the central bank statistical bulletin and were analyzed using multiple regression analyses with REVIEW statistical package.

The result of analysis shows that there is a significant effect of the exchange rate, interest rate, and net domestic credit on the statutory liquidity ratio. However, the exchange rate, interest rate, and net domestic credit show no significant effect on the cash reserve ratio.

The study recommends that monetary authority should re-evaluate these policies to suit the present macroeconomic challenges in Nigeria. Nigeria should develop and strengthen every sector that contributes to the economic growth of Nigeria.

The monetary authority should not only aim at reducing inflation but also ensure that the real economy is stabilized. Nigeria should diversify their resource base and not solely depending on oil as its major export earner.

On the basis of the findings, the researcher concludes that monetary policy in Nigeria has not done well in fighting inflation and stabilizing the economy of Nigeria and as such the policies should be reviewed to solve prevailing macroeconomic problems of Nigeria.

Introduction

1.1 Background of the Study

The economic and financial situation of a country is largely based on the monetary policy being implemented by the Central Bank of the country. It is widely agreed that monetary policy can contribute to sustainable growth by maintaining price stability.

According to Christiano and Fitzgerald (2010), when the rate of inflation is sufficiently low households and businesses do not have to take into account when making everyday decisions on income, expenditure, and investment.

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting the rate of interest for the purpose of promoting economic growth and stability.

Its official goal is to ensure relatively stable prices and low unemployment. In practice, all types of monetary policy, involve modifying the amount of base currency in circulation.

This process of changing the liquidity of base currency through the open sales and purchases of (government-issued) debit and credit instruments is called open market operations.

The constant market transactions by the monetary authority modify the supply of currency and this impacts other market variables such as short term interest rates and the exchange rate.

Monetary policy is the summation of the economic actions taken by regulatory authorities in-charge of regulating or managing the dynamic economic variables that affect changes in the prices of goods and services, hence the value of money, Demchuk,(2012).

Usually, these dynamic economic variables are grouped as short-term macroeconomic factors and include instruments like demand and supply of money, interest/discount rates, the volume of credits, and size of deposit money institutions’ reserves.

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