Effects of monetary policy on inflation in Nigeria (1986-2013)

TITLE PAGE

THE EFFECT OF MONETARY POLICY ON INFLATION IN NIGERIA

(1986-2013)

BY

OLUWATIMILEHIN A. OYEKUNLE

12/27ED/062

BEING A RESEARCH PROJECT SUBMITTED TO THE

COLLEGE OF HUMANITIES, MANAGEMENT AND SOCIAL SCIENCES,

DEPARTMENT OF ECONOMICS AND DEVELOPMENT STUDIES

KWARA STATE UNIVERSITY

IN PARTIAL FULFILMENT OF THE REQUIREMENT OF THE AWARD OF

BACHELOR OF SCIENCE (B.Sc) DEGREE IN ECONOMICS

MAY, 2016

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CERTIFICATION

I hereby certify that this research work was carried out by Oluwatimilehin A Oyekunle

with matric number 12/27ed/062 in the Department of Economics and development

studies, College of Humanities, Management and social sciences, Kwara State University

Malate. The project has been read and approved as meeting of the requirements for the

award of Bachelor of Sciences (B.Sc. Hons) Degree in Economics.

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PROF. LANSANOU KEITA Date

Supervisor

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PROF. LANSANOU KEITA Date

Head of Department

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PROF. SAKA MAMUD Date

Provost of College H.M.S.S

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External Examiner Date

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DEDICATION

I dedicate this project work to Almighty God, and to my loving parents

Mr. T.A and Mrs. M.E OYEKUNLE for all their support throughout the

pursuit of my academic careers. I equally dedicate it to the rest of my

family and my unborn children.

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ACKNOWLEDGEMENT

My in depth gratitude goes to Almighty God for His blessings,

favour and mercy. I am grateful for his endless love, protection,

guidance, grace and showers of blessings upon me and my family.

I also magnify the name of the God for his provision towards my

tuition fees and also for the divine wisdom, knowledge and

understanding.

I express my profound appreciation to my loving and caring

families, Mr. T.A OYEKUNLE, Mrs. M.E OYEKUNLE and my lovely brothers

which are Mr. O.K OYEKUNLE(Corewell), Adeniyi OYEKUNLE (Solarwilly),

Ayodele OYEKUNLE (Hayo Clothing) and my sisters Omolara AYORINDE

and Aminat BABATUNDE.

Besides, I thank my amiable supervisor Prof. Lansanou Keita for

pains in taking time to look into my project work despite his tight

schedules May the almighty grant him his heart desires (amen). Also, I

want to appreciate all lecturers in the department of economic that

have taken me one course or the other. Thank you so much.

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I also want to appreciate all Kwasu Baptist Student Fellowship

family and my decorating unit members (2015/2016 session) for their

prayers and support. I cannot but remember my friends in school Zee,

Jamiu (osha), B.E.B, Johnson (prof), Toyosi, Kudrat, Tolu, Lekan (lekkyl),

Wale, Bunmi, A.Ife, Kemi, Damola, Suliat, Stephen, Olamoney, Boda

Luku, Richky, Slimkris, Horlano and all current economic May

the Almighty God crown all your e=orts.

My appreciation also goes to Yusuf Babatunde and Olaitan Saka

for their hospitality and for taking me has a brother, may God almighty

bless you two and your entire family. My special thanks once again go

to my father, my lovely mother, Olawale oyekunle, Mrs Babatude and

Mrs. Abidoye for their support morally, lly and spiritually

throughout till the completion of my programme.

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ABSTRACT

This paper focuses on the effect of monetary policy on inflation in Nigeria, using time

series data from 1986-2013 obtained from the Central Bank of Nigeria’s Statistical

Bulletin. The main purpose is to investigate the extent to which the apex monetary

authority- the Central Bank of Nigeria has addressed adverse changes in price, output

and interest rates through the use of monetary policy instruments. For this analysis,

ordinary least square, ADF and Durbin Watson statistics was adopted. The findings show

that the level of significant was 1% (0.01) and maximum lag 1(one). It then shows that

three of the variables which are INF, INTR and M2 have unit root at first order or level

and GDP at second order or level. It also shows that monetary policy has a positive and

significant relationship with the general price level. It equally reveals that interest rate

exerts a negative and significant influence on inflation and on the other hand gross

domestic product has a negative and significant influence on inflation. The paper

therefore recommends among others that the autonomy granted the CBN should be

sustained and even strengthened since it is only an independent monetary authority that

can pursue the objective of price stability at the cost of other objectives.

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TABLE OF CONTENTS

TITTLE PAGEi

CERTIFICATIONii

DEDICATIONiii

ACKNOWLEDGEMENTiv

ABSTRACTv

TABLE OF CONTENTSvii

CHAPTER ONE

1.0Introduction

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1.1Background to the Study

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1.2Statement of the Problem

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1.3Objective of the study

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1.4Statement of hypothesis

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1.5Signi

2.1.3Instrument of Monetary Policy in Nigeria15

2.1.4Monetary Policy Regimes in Nigeria18

2.1.5Monetary Policy Before the Structural Adjustment Programme (Sap)18

2.1.6Monetary Policies under the Structural Adjustment Programme (SAP)22

2.1.7Nigeria’s Monetary Policy and the Demand for Reserve Currencies27

2.1.8Concept of Inflation30

2.1.9Effects of Inflation31

2.1.10 Measures of Inflation31

2.1.11Measures To Control Inflation32

2.2Theoretical Review33

2.2.1Demand-Pull Inflation or Monetary Theories of Inflation33

2.2.2Keynes’s Theory of Demand-Pull Inflation34

2.2.3Cost-Push Inflation37

2.2.4Theories of Monetary Policy39

2.3Empirical Review47

CHAPTER THREE

3.0Introduction53

3.1 Sources of Data53

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3.2Model Specification 53

3.3Estimation Technique55

3.4Evaluation Criteria56

CHAPTER FOUR

4.1 Introduction 59

4.2Presentation and Evaluation of Regression Result59

4.2.1The Test for the Unit Root ADF (Augmented Dickey-Fuller Test)59

4.2.2Regression Analysis60

4.3Interpretation of the Result61

4.4Evaluation Base on Statistical Test 62

4.4.1T-Statistics62

4.4.2F-statistics63

4.4.3Trend of Inflation64

4.5 Evaluation Base on Economic Theory64

4.5.1 Trends between inflation and interest rate66

4.5.2Trends between inflation and GDP67

4.6Econometric Criteria 67

4.6.1Test for Autocorrelation67

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4.6.2Test for Heteroscedasticity68

CHAPTER FIVE

5.1 Summary of the study69

5.2Conclusion 70

5.3Policy Recommendation70

REFERENCES72

APPENDIX75

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