International Journal of Research and Scientific Innovation (IJRSI) | Volume IX, Issue II, February 2022 | ISSN 2321–2705

Effectiveness of Monetary Policy in Controlling Inflation in Nigeria.

Ogunjinmi Olusola.O.
Department of Economics, Lead City University, Ibadan, Oyo State, Nigeria

Abstract
This paper investigated the effectiveness of monetary policy in controlling inflation in Nigeria using secondary annual data spanning from 1981 to 2019. Specifically, the paper examines if there exist any form of relationship between monetary policy and inflation in Nigeria. Money Supply, Treasury Bills Rate, Monetary Policy Rate and Exchange Rate were the variables used in the study to check inflation. The paper employed Johansen cointegration method to check for the long run relationship between the variables. Ordinary Least Square (OLS) was adopted because of its property of Best Linear Unbiased Estimator. The Johansen co- integration test revealed the existence of long-run relationship between the variables. However, the empirical result of the OLS test showed that monetary policy rate, money supply and treasury bill rates exert influence on inflation in Nigeria. While exchange rate depreciation leads to inflationary growth. This result is consistent with the prediction of economic theory. The study therefore concluded that money supply, treasury bills rate, monetary policy and exchange rate had influence on inflation within the period under consideration and recommends that monetary authority should put in place schemes to make them more effective perhaps by offering competitive rates and the nation Nigeria shift from being a consumption driven (import) economy to production based (export) economy for the impacts of these policies to achieve desired results.
Keywords: Money Supply, Treasury bills rate, monetary policy rate, exchange rate, inflation, co-integration.

INTRODUCTION
Monetary policy is the combination of actions, steps and decisions taken by the monetary authority (Central Bank) to control the supply of money in the country, with the objective of promoting price stability and economic growth. The connection between money in circulation and inflationary rate are the main indicator for the measurement of an economy’s prosperity, performance and growth abilities. The regulation of the volume of money in circulation and maintaining price stability has been one of the main objectives of emerging nations such as Nigeria. Chaudire, Ismail, Farooq & Murtaza: Monetarist economist has maintained that there is an indicating relationship between inflation and money supply and uncontrollable increase in the volume of money may have adverse effect on economic condition. The Keynesians however believe in the efficacy of fiscal policies – government expenditure and revenue in dealing with inflation; while the monetarists believe inflation can only be managed through controlling excess liquidity and money supply in circulation. (Ruby, 2003; Blinder and Rudd, 2008)
Adodo, Feyisayo Loveth 2018 observed that irrespective of the policy thrust of policy makers in controlling inflation, just a little have been achieved in curbing the threat of inflation in Nigerian economy as inflation is the leading cause of economic impedance and social and political unrest in developing countries like Nigeria. Furthermore, the paraphernalia of general price increase include continuous fall of the purchasing power of money, inequality in distribution of income, loss of social welfare due to price increases and fall in reserves and investments.
Su Dinh Thanh 2015 believes that inflation causes excessive relative price variability and misallocation of resources.
Inflation is the general rise in the price of goods and services. The delinquent of inflation has always been a problem as a result of its effect on overall economic activities. Persistent rise in the general price of goods and services leads to the decrease in the value of money, this leads to fall in unit or quantity of goods and services a currency can buy. Inflation can as well result to rise in the cost of production, and excess of demand over supply.