THE IMPACT OF MONETARY POLICY ON INFLATION RATES IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND OF THE STUDY
The word inflation rings a bell in the market economics of the world. It is a monster that threatens all economics because of its undesirable effects. The problem of inflation is not a new phenomenon, it is a household word in many market oriented economics. Although several people, producers, consumers, professional, non-professional, trade unionist, workers and the likes tacks about inflation, yet only selected few knows or even bother to know about the mechanism of inflation and how it is controlled.
    Since the establishment of the Central Bank of Nigeria (CBN) in 1959, the Apex Bank has continued to play its traditional role which is the regulation of the stock of money in circulation in such a way as to promote social welfare. This role is anchored on the use of monetary policy, that is fully targeted towards the achievement of full employment equilibrium, rapid economic growth, price stability and external balance. However, over the years the major goals of monetary policy in Nigeria has been to control inflation. The threat inflation poise in world economies especially Africa has led to widespread debate about it’s causes, and how it can be controlled, many economists that favour traditional adjustment strategies contend that monetary growth arising particularly from the domestic bank financing of large budget deficits, is the major cause of inflationary pressures, critics of the traditional approach have identified exchange rate depreciation as a major factor. Controversy between these two view points has led to differing prescriptions about the appropriate policy response. Those focusing on monetary factors have emphasized reducing government budget deficits and restraining credit to public enterprises.
Those emphasizing the role of exchange rate depreciation by comparism have argued further exchange rate adjustment, preferring instead a combination of income policies, price controls and demand reduction measures.
    However, the Nigerian government and policy makers have obviously realized that inflation is inimical to economic growth and has over the years reviewed the ways in which inflation can be a controlled. It is on this background that this study would investigate the effectiveness of the monetary policy with respect to inflation within the context of the Nigerian economy.
1.2    STATEMENT OF THE RESEARCH PROBLEM
    Given the number of years the Central Bank was established, and the substantial financial resources and endowment available in country coupled with the existing institutions, one will expect that the Nigerian economy would have been well established (Fola Wewo et al 2006). However, one could claim that the entire spectrum of the economy has not been sufficiently active especially when compared with the economy of other developing countries some of the problems that are identified for this include, political problems in the country, poor implementation of past policies, insufficient database, ethical problems and a host of others.
    In view of the foregoing therefore, the study seeks to empirically determine the impact of monetary policy on inflation rate in the Nigerian economy.
Specifically, the study would provide answer to the following research questions.
i.    Does money supply affect inflation rates in Nigeria?
ii.    Does CBN lending rate have any impact on inflation rate in the Nigeria economy?  
iii.    Does increasing the reserve requirement of banks and other financial institution reduce inflation?
iv.    Does open market operations of the Central Bank of Nigeria manage the quantity of money in circulation.
1.3    OBJECTIVES OF THE STUDY
    The main objective of this study is to assess the effectiveness of the monetary policies in Nigeria. However the following specific objectives would also be achieved.
i.    To discuss the causes and consequences of inflation in Nigeria.
ii.    To examine the trend in monetary policy and inflation in Nigeria over the years.
1.4    RESEARCH HYPOTHESIS
    The hypothesis to be tested in the cause of this study is:
Ho:    Money supply does not affect inflation rates in Nigeria.
Hi:    Money supply affect inflation rates in Nigeria.
Ho:    CBN lending rate does not have impacts on inflation rate in the Nigerian economy.
Hi:    CBN lending rate have impacts on inflation rate in the Nigerian economy.
Ho:    Increasing the reserve requirement of Banks and other financial institution does not reduce inflation.
Hi:    Increasing the reserve requirement of Banks and other financial institution reduce inflation.
Ho:    Open Market operations of the Central Bank of Nigeria does not manage the quantity of money in circulation.
Hi:    Open Market operations of the Central Bank of Nigeria manage the quantity of money in circulation.
1.5    SIGNIFICANCE OF THE STUDY
    This study is significant in the following ways.
1.    It would provide an objective view of the effectiveness of the monetary policy in Nigeria.
2.    The study would provide an econometric basis upon which to examine the effect of monetary policy variables on inflation.
3.    It would provide policy recommendations to policy makers on ways to combat price frustrations through other economic policies.
Lastly, the study would be relevant to the government, policy makers, students, academia, researchers, and prospective investors.
1.6    SCOPE OF THE STUDY
    This study focuses on the impact of monetary policy on inflation rates in Nigeria. The study covers the period 1981 – 2011 and relevant data shall be sourced from the Central Bank of Nigeria, statistical bulletin and the Nigerian stock exchange.
1.7    LIMITATIONS OF THE STUDY
    As there is no perfect study, the following were encountered in the cause of this study, non-availability of up to date statistical data, low response rate from those in charge, of data in the process of gathering data from secondary sources.
1.8    ORGANIZATION OF THE STUDY
    This study shall be divided into five chapters, the first chapter contains the introduction, chapter two deals with the literature review, the research methodology is presented in chapter three while data presentation and analyses are in chapter four, summary of findings, recommendations and conclusion will be contained in chapter five.
1.9    DEFINITIONS OF TERMS
1. Price Stability
    Price stability exists when overall prices are stable (i.e money is an effective store of value). This does not mean that prices are frozen, but rather that taken on the whole, they are stable. In an environment of price stability you would expect some prices to be rising but others to be failing.
2.    Inflation
    Inflation is a rise in the general level of prices of goods in an economy over a period of time. It is a sustained increase in the general level of prices for goods and services.
It is measured as an annual percentage increases. As inflation rises, every naira you own buy a smaller percentage of a good or service.
3.    monetary Policy
    The regulation of the money supply and interest rates by a Central bank, such as the Central bank of Nigeria, in  order to control inflation and stabilize currency. Monetary policy is one of the ways the government can impact the economy. By impacting the effective cost of money, the CBN can affect the amount of money that is spent by consumers and businesses.