International Journal of Research and Innovation in Social Science (IJRISS) |Volume VI, Issue X, October 2022|ISSN 2454-6186
Monetary Policy and Inflation Level in Nigeria
Emeka Idika, Emmanuel Chinanuife, Monday Itua, Jeremiah Eleojo Idoko
Department of Economics, College of Management and Social Sciences, Salem University, Lokoja, Nigeria
Abstract: Citizens in Nigeria are faced with continuous rise in the general price level and as a result, most families find it difficult to meet up the basic life sustaining needs. The price level in Nigeria is now a serious concern as the cost of feeding increases daily without a corresponding increase in household income. This study used time series data from the period of 1983 to 2021 to assess the impact of monetary policy on inflation in Nigeria. To ensure the stationarity of the variables in the model, the study adopted the Phillip Peron Unit root test. Based on the order of integrations, bound test approach to cointegration was used to ensure the existence of long run association among the variables in the model. An autoregressive distributed lag model is used to test the impact of monetary policy variables on inflation and on gross domestic product. The study found that monetary policy negatively affects inflation in Nigeria through liquidity ratio, money supply and exchange rate. The study therefore recommends that monetary policy instruments such as liquidity ratio, money supply and exchange rate should be used when the target is to reduce or control inflation in the country. Government should adopt loose monetary policy to stimulate aggregate purchases. With this, money supply can be increased when there is decrease in aggregate spending in an economy.
Key words: Monetary Policy, Inflation, Economy
I. INTRODUCTION
The concept of inflation is contentious and whether monetary policy affects inflation positively or negatively remains a debate in literature. Inflation describes a consistent and ongoing increase in an economy’s overall level of prices for goods and services. The most obvious sign of it is the decrease in the value of money (Ojo 2011). Yahaya (2010) asserts that the fiscal, monetary, and balance of payment factors are the main causes of inflation. On the one hand, an expansion of the money supply is thought to be the cause of inflation. On the other hand, the fiscal explanation believes that budget deficits are the primary source of inflation, and that inflation rises as a result. However, as government deficits are frequently supported by money creation in emerging nations, the fiscal side is strongly related to the monetary theories of inflation. The exchange rate is emphasised in the balance of payments element. Inflation is typically caused by increasing import costs and an increase in inflationary expectations, which are sometimes handled by a faster pay indexation process. High inflation is typically thought to have mostly negative effects on the economy (Enu, 2010; Hussain & Haque, 2017). Ogwuma (2007) acknowledged the basic function of money in an economy as well.