MONETARY POLICY AND INFLATIONARY TREND IN NIGERIA
ABSTRACT
    The study empirically determines the relationship between monetary policy and inflationary trend in Nigeria. The rationale for this study was the realization that inflation has a way of negatively affecting monetary policy in any country. The empirical strategy adopted in this study is the cointegration econometric technique to annual time series data in Nigeria covering the period 1961 to 2011.
    The results from the analysis show that in the short run, all the explanatory variables such as interest rate, money supply and exchange rate have significant positive relationship with inflation rate in Nigeria; in the long run, interest rate has a pervasive effect on inflation rate in Nigeria, money supply does not have any impact on inflation rate in Nigeria in the long run. Also, in the long run, only exchange rate has a significant but negative     impact on inflationary trend in Nigeria.
    The study recommends among others that there is need to take cognizance of the lag effect in the design of monetary policy in order to ensure that policy targets are effectively monitored. In particular, monetary policy needs to be forward looking in its approach to price stability in Nigeria.
 TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1    Background to Study                        
1. 2    Statement of the Research Problem                
1.3    Objective of the Study                        
1.4    Hypothesis of the Study                    
1.5    Significance of the Study                    
1.6    Scope of the Study                        
1.7    Limitation of the Study                        
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction                            
2.2    Monetary Policy in Developing Countries        
2.3    Types of Monetary Policy                    
2.3.1    Inflation Targeting                        
2.3.2    Price Level Targeting                        
2.3.3    Monetary Aggregates                        
2.3.4    Fixed Exchange Rate                        
2.3.5    Gold Standard                            
2.4    Does the Central Bank need to have Complete Control over Inflation?                        
2.5    Inflation Targeting and Optimal Monetary Policy    
2.6    Empirical Evidence of Monetary Policy and         
Inflationary Trend around the World            
CHAPTER THREE: METHODOLOGY OF THE STUDY
3.1    Introduction                            
3.2    Theoretical Framework                     
3.3    Model Specification                        
3.4    Method of Data Analysis                    
3.5    Source of Data                            
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1    Data Analysis                            
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1     Summary of Findings                        
5.2     Policy Recommendations                    
5.3     Conclusion                                
    Bibliography                                

Appendix                                 
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND TO THE STUDY
    Monetary policy refers to a combination of measures designed to regulate the value, supply and cost of money in an economy, in consonance with the expected level of economic activity. For most economies, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth, and sustainable development (Folawewo, 2006). These objectives are necessary for the attainment of internal and external balance, and the promotion of long-run economic growth.
    On the other hand, inflation, which is a household name in many market oriented economies across the globe today, refers to a general increases in the level of price sustained over a long period of time in an economy. When the general price level rises, each unit of currency buys fewer goods and services, thus eroding the purchasing power of money. Price inflation is measured by inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time. The effects of inflation on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation which may discourage investment and savings, and if inflation is very rapid, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth is money supply (Geetha et.al (2011).
    According to Muritala (2011), the importance of price stability derives from the harmful effects of price volatility, which undermines the ability of policy makers to achieve other laudable macroeconomic objectives. There is indeed a general consensus that domestic price fluctuation undermines the role of money as a store of value, and frustrates investments and growth. The empirical studies of Ajayi and Ojo (2001) and Fischer (2002) on inflation, growth and productivity have confirmed the long-term inverse relationship between inflation and growth.
    One of the major objectives of monetary policy in Nigeria is price stability. But despite the various monetary regimes that have been adopted by the Central Bank of Nigeria over the years, inflation still remains a major threat to Nigeria’s economic growth. Nigeria has experienced high volatility in inflation rates. Since the early1970’s, there have been four major episodes of high inflation, in excess of 30 percent. The growth of money supply is correlated with the high inflation episodes because money growth was often in excess of real economic growth. However, preceding the growth in money supply, some factors reflecting the structural characteristics of the economy are observable. Some of these are supply shocks, arising from factors such as famine, currency devaluation and changes in terms of trade (Muritala, 2011).
1.2    STATEMENT OF THE RESEARCH PROBLEM
    The Central Bank of Nigeria is statutorily saddled with the responsibility of carrying out sound monetary policy through changes in the target overnight rate of interest in the country. These changes are however transmitted to the economy through their influence on market interest rates, domestic asset prices and the exchange rate, which affect total demand for Nigerian goods and services.  The balance between this demand and the economy’s production capacity is, over time, the primary determinant of inflationary pressures in the country. Monetary policy actions take time, usually from six to eight quarters—to work their way through the economy and have their full effect on inflation.  For this reason,
monetary policy must be forward looking in order to achieve the desired results of a stable macroeconomic stability (Bank of Canada, 2012).
    Many emerging market economies are grappling with a massive surge in net capital inflows, in particular, increased portfolio investment, and trying to manage these through the central bank intervention in the foreign exchange market. The associated macroeconomic problems in emerging markets raise questions about the desired policy options, namely, the use of capital controls and regular interventions in the currency market. These instruments, in turn, undermine the exchange rate channel as an adjustment mechanism.
    According to Sushanta and Ricardo (2011),double-digit inflation has been a major threat to economic growth in many developing countries, Nigeria inclusive, but the monetary authority in these countries continue to maintain a pro-growth monetary policy stance, as these economies have a large negative output gap or excess productive capacity. Emerging markets have substantial excess capacity with regards to labour, and thereby require higher public investment in infrastructure to create conditions for sustained growth. Hence, understanding the real effect of monetary policy shocks in the Nigerian economy is crucial. For these reasons, the current study seeks to empirically examine the relationship between monetary policy and inflationary trend in the Nigeria context.
    Specifically,    the study seeks to provide answers to the following research questions:
(i)    What is the relationship between monetary policy and inflationary trend in    Nigeria?
(ii)    Is there any relationship between money supply and inflationary trend in     Nigeria?
(iii)    Does interest rate influence inflationary trend in     Nigeria?
1.3    OBJECTIVE OF THE STUDY
    The main objective of the study is to examine the relationship between monetary policy and inflationary trend in Nigeria. However, the specific objectives are to:
(i)    Determine the impact of money supply on inflationary trend in     Nigeria.
(ii)    Determine the effect of interest rate on inflationary trend in Nigeria.
1.4    HYPOTHESES OF THE STUDY
    The hypotheses to be tested in the course of this study are as follows:
(i)    Monetary policy has no effect on inflationary trend in Nigeria.
(ii)    Money supply does not have any significant impact on inflationary trend.
(iii)    There is no significant effect of interest rate on inflationary trend in Nigeria.
1.5    SIGNIFICANCE OF THE STUDY
    The study is significant in the following respect:
Firstly, the results from the study will provide relevant data to the government and policy makers with respect to the effective and efficient management of the monetary policy issues affecting the country, which will in turn engender the overall growth of the economy.
Secondly, investors, potential investors, lenders and borrowers and all stakeholders in the financial sector of the economy are all interested in the monetary policy- inflationary rate direction in the country and hence, enable them to make some inform decisions with respect to investment and financing decisions affecting their organizations.
Furthermore, the study will also be relevant to researchers, academia, students of finance and allied disciplines, as it will provide them relevant data to carry out further studies in this area or similar areas if they so wish.
1.6    SCOPE OF THE STUDY
    The study is within the context of the Nigerian economy. It covers a period of thirty two years (1980 to 2011), and relevant data shall be sourced from the Federal Bureau of Statistics and the Central Bank of Nigeria Statistical Bulletin (2011, 2012).

1.7    LIMITATION OF THE STUDY\
    The two limitations envisage in this study has to do with the accuracy of the data used as well as the sources of data. However, effort will be made to minimize errors and thus assure the reliability of results obtained.