The Effectiveness of Monetary Policies in Controlling Inflation in Nigerian Economy

Introduction

The Nigerian economy is aiming to have the sustainable growth path. Through the International Monetary Fund (IMF) the government can adopt the comprehensive Structural Adjustment Program (SAP). Nigeria has a structural and sectoral macroeconomic policy reform and the main strategies were (a) the liberalization of the external trade and payment systems, (b) the adoption of a market-based exchange rate for the domestic currency ─ Naira, (c) the elimination of price and interest rate controls, and (d) the reliance on market forces as the major determinants of economic activity (Owoye & Onafowora, 2007).The market reform in the financial sector such as the banking system can use the monetary control and instruments for implementing monetary policy in Nigeria.

Background and Problem Statement

In any countries across the globe, the fiscal and monetary policies seek at achieving relative macroeconomic stability. The monetary policy framework in Nigeria is more than the objective of monetary policy is price and exchange rate stability. The monetary strategy in the inflation management is based on the view that inflation is essentially a monetary phenomenon. The Nigerian economy targets the money supply and its growth can be the main objective of the price stability. In order to promote the appropriate methods in monetary policy, the supply growth is firstly considered in targeting the inflation. However, how effective are the monetary policies in Nigeria to control the inflation in their economy?

Research Aim and Objectives

The main aim of the study is describe the effectiveness of the monetary policy in Nigerian economy. In order to achieve this aim, there are three objectives that should be considered. First is to determine the superiority of policies in the achievement of the macroeconomic stability. Second is to compare the effectiveness of the fiscal policy with the monetary policy. And third is to investigate the ideal macroeconomic stability suitable for the country. Through the use of these objectives, the study can organize a predictions and good planning.

Literature Review

The Central Bank of Nigeria (CBN) mix the indirect instruments are used in the country to achieve the monetary objectives. The instruments included the reserves requirements, open market operation on Nigerian Treasury Bills (NTBs), liquid asset ratios and the discount window (Owoye & Onafowora, 2007). Generally, both fiscal and monetary policies seek at achieving relative macroeconomic stability. Based on countries’ experience on the role of monetary policy in controlling economics instability, there is an advantage that the same monetary policy can control the inflation rate and the instability in exchange rate. Various studies show that the application of the monetary policy can influence the financial aspect of the government through the determination of the inflation tax rate. This tax rate affects both the rate of inflation and the real exchange rate, thereby causing volatility in their rates (Folawewo & Osinubi, 2006). In Asia, wherein there are developing countries, there are policy options that can help the nations in dealing with the inflation. Obviously, the inflationary environment causes turbulent in the policymakers as seen in the action of to control the inflation in a depressed economic activity. Therefore, the authorities are forced to weigh the benefits and drawbacks that can stabilize the prices against the costs of slowing the growth. But with the help of the monetary policy, there are signs of growth generated in the economies, although the prices are affected. In this case, the central banks need to be more decisive in tightening the monetary conditions. Along with this activity, there are selective fiscal measures that can allow the currencies to rise faster to handle the pressures cause by the inflation. In return, there is an enhancement in the credibility of the monetary authorities which is adds to a greater challenge in the central banks (ADB, 2008). As an overall view, the effectiveness in monetary policy is an issue being faced by the economies and the central banking (Rasche & Williams, 2005).

Methodology

The suggested method in the study is the use of secondary information coming from the economic reviews of the country. It is a good start if the study can determine the recent reforms and successful monetary policies from the previous years to link the present situation of Nigeria with its literature on its fiscal and monetary policies. The materials or sources that can be use are the International Monetary Fund (IMF) Reports, Nigerian Treasury Bills (NTBs), Central Bank of Nigeria (CBN), and participating Nigerian banks to organize the ideas regarding the measurement of money against inflation.

References:

ADB, (2008) Asia Economic Monitor, Asian Development Bank [Online] Available at: http://aric.adb.org/pdf/aem/jul08/Jul_AEM_complete.pdf [Accessed 04 Aug 2010].

Folawewo, A.O., & Osinubi, T.S., (2006) Monetary Policy and Macroeconomic Instability in Nigeria: A Rational Expectation Approach, Journal of Social Science 12(2) [Online] Available at: http://www.krepublishers.com [Accessed 04 Aug 2010]

Owoye, O., & Onafowora, O., (2007) M2 Targeting, Money Demand, and Real GDP Growth in Nigeria: Do Rules Apply?, Journal of Business and Public Affairs 1(2) [Online] Available at: http://www.scientificjournals.org/journals2007/articles/1229.pdf [Accessed 04 Aug 2010].

Rasche, R.H., & Williams, M.M., (2005) The Effectiveness of Monetary Policy [Online] Available at: http://research.stlouisfed.org/wp/2005/2005-048.pdf [Accessed 04 Aug 2010].