MONETARY POLICY AND PRICE STABILITY IN NIGERIA (DECEMBER, 2006 THROUGH FEBRUARY, 2012
MONETARY POLICY AND PRICE STABILITY IN NIGERIA (DECEMBER, 2006 THROUGH FEBRUARY, 2012
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Date
2014-02-11
Authors
ABUBAKAR, DALHATU
Professor (Mrs) P. S Aku, Dr Njiforti Peter
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Abstract
Abstract
This research work evaluates the responses of inflation, interest and exchange rate to shocks
in Monetary Policy (captured by MPR) as well as the impacts of MPR on these
Macroeconomic Variables. The study used monthly data spanning from December, 2006
(when the MPR was introduced) through February, 2012. Following Joao and Andrea
(2006), the research used Structural VAR to estimate the model. The result shows that
inflation responds to shocks in MPR only in a fairly unstable manner (a pattern that is almost
unpredictable); in the first four periods, positive shocks in MPR could not bring down
inflation but thereafter, any further increase in MPR produced gradually declining but
positive rate of interest. On the other hand, exchange rate responds to shocks in MPR in a
relatively downward fashion and quickly assumes upward trend from the second period
lasting throughout the period, while interest rate, responds quickly and positively to shocks in
MPR from the first thorough the last period.
Therefore, interest and exchange rates are more responsive to shocks in MPR than inflation
and above all sometimes changes in MPR cannot guarantee the expected changes in Inflation
(because of large informal sector as well as policy divergence between the monetary and
fiscal authorities among other reasons). Hence, of all the three variables, inflation is the most
difficult to deal with and stability of which is a necessary condition for the achievement of
stability in the other two variables (interest & exchange rates). More so, interest and
exchange rates as well as MPC meetings are better predictors of MPR (because of their high
sensitivity to it) than the rate of inflation. The result also uncovered that as the most difficult
enemy of the economy, inflation cannot be effectively and efficiently conquered with the
variation in MPR alone, other instruments particularly Cash Reserve Requirement (CRR)
and especially Open Market Operations (OMO) should be prudently used to compliment the
efficacy of MPR. Consequently, the paper further recommends the current monetary
tightening stance of CBN but should be used with caution, improvement and expansion of the
cash-lite policy and non-interest banking of the CBN, infrastructural development,
harmonization of fiscal and monetary policy as well as the reduction in the number of MPC
meetings to at most quarterly unless in case of emergency.
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TABLE OF CONTENT
Description
A thesis submitted to the school of postgraduate studies Ahmadu Bello
University, Zaria
In partial fulfilment of the requirements for the award of
Master Degree of Science (M SC) Economics
Keywords
MONETARY, POLICY, PRICE, STABILITY