Monetary policy consists of discretionary measures designed by monetary authorities to regulate and influence the supply, cost and direction of money and credit provided to the economy. This aspect of macroeconomic policy remains one of the cornerstones of economic policy formulation and implementation. Monetary policy is relevant irrespective of the economic framework in place.


With the adoption of the inflation, this study examine the impact of monetary policy in Nigeria using econometric techniques, a model that captures the impact of inflation on monetary policy is specified and estimated using the techniques of Ordinary Least Square for the period of 1985-2008.


The main findings emerging in this study indicated that the demand for money has an inverse relationship between the level of interest rates and inflationary rates. The study also advocated for the inclusion of partial adjustment scheme while modeling money demand functions and hence monetary policy in Nigeria.



Fig. 1         The Demand Curve for Legal Tender in both Equations give a Rectangle Hyperbole 29


Fig. 2         The Relationship Between Money Supply and the Value of Money


Fig. 3         Extreme Keynesia View of the Impossibility of Equilibrium Solution at Full Employment



Title page





Table of Contents



1.0    Introduction

1.1.1 Review of Monetary Policy In Nigeria

1.2    Statement of Problem

1.3    Relevant Research Questions

1.4    Significance of the Study

1.5    Objectives of the Study

1.6    Statement of Hypothesis

1.7    Methodology of the Study

1.8    Limitation of the Study

1.9    Organization of the Study

1.10 Definition of Terms




Theoretical Framework and Literature Review

2.1    Historical Background

2.2    The Worldwide Decline in Inflation

2.3    Theoretical Analysis of Monetary Policy as a Means

to Control Inflation

2.4    Monetary Policy in Nigeria

2.5    Theoretical Framework

2.5.1 Theoretical Foundation of Monetary Policy

2.5.2 Monetary Policy and the Balance of Payment

2.5.3 Supply and Demand for Money

2.6    Literature Review

2.6.1 Empirical Studies on the Effectiveness of Monetary Policy



3.1    Methodology

3.2    Method of Data Collection

3.3    Processes involved in Data Collection

3.4    Research Design Methodology

3.5    Research Questions and Research Hypothesis

3.6    Characteristics of the Study Population

3.7    Sampling Designs and Procedures

3.8    Data Collection Instrument

3.9    Pilot Study: Validity and Reliability

3.10 Techniques and Procedure for Processing

3.10.1 Identification of Variables




4.1   Presentation and Analysis of Data

4.2    Criterion Group Returns: Characteristics and Classification Respondent

4.2.1 Economics a Priori Criteria

4.2.2 Statistical Criteria

4.2.3Economic Criteria

4.3    Model Specification

4.4    Presentation and Analysis of Data

4.5    Interest Rate

4.6    Money Supply

4.7    Characteristics of Inflation Rate Variable

4.8    Analysis of Result



5.0   Summary, Conclusion and Recommendation

5.1    Summary

5.2    Conclusion

5.3    Recommendation







Monetary policy plays a very crucial role in any economy, being the channel through which financial resources flow from one segment of the economy to the other. It, therefore, represents the major foundation of the modern market economy. Essentially, there are three pivotal roles for the monetary policy namely; the Monetary Policy role, the financial stability role and the overall economic role. Monetary policy in the current Nigeria context, encompasses actions of the central bank that affect the cost and availability of commercial and merchant bank's reserve balances and thereby the overall monetary and credit conditions in the economy (Akaku, 1993) .The primary goal of such actions is to ensure that overtime, the expansion in money and credit will be adequate for the long run need of the growing economy at stable prices.


The short-run objective of monetary policy however include, combating inflationary pressure, restoring a sustainable balance of payment, attainment of full employment level of resources, equitable distribution of income, maintaining a stable exchange rate at internationally competitive level . Sometimes, changes in monetary are undertaken as part of concerted actions to remove obstacles to the growth of savings and efficient allocation of investment.


As is often the case ,the pursuit of these short -term goals tends to conflict with the basic goal of stable, long-term for example, a vigorous anti-inflationary stance would typically require the sacrifice of output growth in the short term. The same might be the case where priority is given to restoring a healthy balance of payments. Similarly, a stable exchange rate objective might call for a tighter control on aggregate demand which would in turn adversely impact output. Moreover, attaining the objective of exchange rate stability at local currency, with attendant cost pressure on the price level. In sum, difficult trade-offs are inherent in the conduct of monetary policy, making the central bank, a target of criticism and various kind of pressures. Over the years, the objectives of monetary policy have remained the attainment of internal and external balance. However, emphases on techniques/instruments to achieve those objectives have changes over the year. The major phase in the pursuit of monetary policy that is being examined was between 1992 to 2006. The economic environment that guided monetary policy before 1986 was characterized by the dominance of oil sector, the expanding role of the public sector in the economy and over dependency on the external sector. in other to maintain price stability and a healthy balance of payment position, monetary management depended on the use of direct monetary instrument such as credit ceilings, selective credit controls, administered interest and exchange rates, as well as the prescription of cash reserve requirements and special deposits. The use of market based instruments was not feasible at that point because of the underdeveloped nature of the financial markets and the deliberate restraint on interest rates.


However, as a result of the crash in international oil market in the 1980s and the resultant deteriorating economic conditions, the Structural adjustment Programme (SAP) was adopted in July, 1986. This programme was designed to achieve fiscal balance and balance of payments viability by altering and restructuring the production and consumption patterns of the economy, eliminating price distortions, reducing the heavy dependence on the crude oil exports and consumers good imports, enhancing the non-oil export base and achieving sustainable growth. Other aims were to rationalize the role of the public sector and accelerate the potentials of the private sector.


Given the important role that well-functioning monetary policies has on monetary policy, financial stability and overall economic activity, the Central Bank of Nigeria has put in place a set of national monetary policies objectives as a broad guideline and framework for all monetary policies initiatives. In setting out the objectives of the National Monetary policies, the goal is to ensure that the system is available without interruption, meet as far as possible all user& needs, and operate at minimum risk and reasonable cost.


During the course of the past ten years the Central Bank of Nigeria (CBN), in collaboration with the Bankers Committee, launched the first major initiative to modernize the monetary policy. The starting point was to automate the cheque clearing system and making it a veritable platform for development of electronic payment channels. Hitherto cheques processing and computations of the net settlement position of banks were done manually. The implementation of the new procedures and rules based on MICR technology revolutionized the cheque clearing system. Consequently, a Centralized Automated Clearing process was established in Lagos clearing zone, whereby with MICR Reader Sorters, necessary information on cheques are captured, built into clearing files and electronically transmitted to the clearing house, from where the net settlement position of participating banks are automatically computed and also electronically transmitted to the Central bank for final settlement.


The role of monetary policy in the management of inflation is an important topic that goes a long a way to help in nation building. It can also be seen as an academic point of knowledge to students on the type of monetary policies that exist and the best that can help manage inflation.


A monetary policy is a set of instructions and procedures used for the transfer of value and settlement of obligations arising from the exchange of goods and services within a defined market. The ultimate goal of any monetary policy is to ensure that exchange of monetary value is achieved with the least risk, inconvenience and cost. For a monetary policy to be described as efficient therefore, it must be reliable, prompt, accessible, secure, and cost effective.


The I970s witnessed a burst of creativity in the establishment of electronic monetary policies in the Western world, but there was a relatively slow rate of adoption by consumers and businesses. However, these initial setbacks did not deter the initiators of these innovative modes of payment. Today, advancements in technology have made possible the introduction of diverse electronic payment instruments, which were unheard of a few decades ago.


The Nigerian Monetary policy has not grown beyond the traditional reliance on cash. The use of cheque as a mode of payment is only beginning to gain some level of acceptance: but skepticism and lack of trust is still quite high. As a result, most Nigerians, and even corporate entities are averse to accepting cheques as instruments of payment, preferring cash or at best, certified cheques. Cash however has its own limitations, which make it an insecure, cumbersome and unreliable mode of payment, especially for high value transactions.


The limited electronic payments techniques in the Nigerian financial system have resulted in limited acceptance, and at times, total rejection from end users and other players in the payments process. However, because the Nigerian monetary policy is an integral part of the global monetary policy especially in this era of globalization, e­commerce, and technological advancements, the Nigerian monetary policy must be reformed to meet global standards as well as the needs of local consumers.


Over the years, the Nigeria monetary policy has witnessed tremendous development form its rudimentary level during the early years of banking business to a fairly development system. The Nigeria monetary policy and' settlement system combines some elements of the sophisticated architecture that features in advanced economics and some elements of primitive economy. The system is predominantly cash-driven, as evidenced by the value of currency outside the banking system.


A nation's monetary policy is an integral part of its financial and monetary structure. The efficiency or otherwise of the monetary policy affects the economy in many ways.


The monetary policy is a vital link between the financial system and the real sector of the economy'. The payment instrument in Nigeria is predominantly cash. The prominence of cash for transaction purposes increases the volume of currency in circulation or high­ powered money, which renders monetary control difficult, if not impossible. There is general consensus in the literature that an inefficient monetary policy distorts the transmission mechanism of monetary policies, even when the design and objectives are laudable (Nnanna, 1999).


The Nigerian monetary policy is still at the rudimentary stage. According to a study by Accenture, at least 90% of transactions are based on cash as the medium of value transfer. (Source: See Proceedings of Smartcard Expo 2002). The setbacks the system has suffered over the years as a result of its over-reliance on cash has necessitated the call for a reform of the monetary policy to reduce the level of cash in circulation and move it towards a near-cashless society.





The Sub-Committee was set up at the February 2004 meeting of the Bankers' Committee with a mandate to review and enhance the efficiency of the existing monetary policy.




To achieve its mandate, the Committee set out the following as guiding principles:


Vision: To establish a monetary policy that is secure, efficient, reliable, cost effective and consistent with world-class global best practices by April 1, 2006.


Mission: To create an efficient monetary policy that deploys reliable, secure and convenient Information and Communication Technology (ICT) tools to satisfy the financial transaction needs of the Nigerian economy.


In the Nigeria economy, the study of Inflation, interest Rate and exchange rate as well as the monetary and fiscal development yield a mixed result, for example, while interest levels in over a decade and credit to the private sector has grown at unprecedented annualized level of about 39 percent (higher than the target of 30 percent under needs), thereby, spurring rapid level growth of the non-oil sector, the inflationary pressure have been worrisome. The broad money supply (M2) has growth at about 22 percent at the end September (as against the target is for end period 2006). The rise in M2 reflected the increase in aggregate credit (net) to the domestic economy as well as the rise in net foreign assets, through the magnetization of the 2004 excess crude earning and increase benchmark oil price for fiscal 2005.


The foreign exchange market remained stable, and the Naira has appreciated against all major currencies in all markets. At the Das market, the Naira/ Dollar rate has appreciated to about Ni 29.55 (down from N132.85 at the beginning of 2005), and the inter-bank rate also of appreciated to about N132 (down from N137). The Naira has also appreciated against the pound sterling and the Euro in both the official and parable markets.



The direct approach to monetary management was in vogue. Under this approach, the most popular instrument of monetary policy was the issuance of credit rationing guidelines, which primarily set the rates of change for the components and aggregate commercial bank loans and advances to the private sector. The sectorial allocation of bank credit in CBN guidelines was to stimulate the productive sector and thereby stem inflationary pressures. The fixing of interest rates at relatively low levels was done mainly to promote investment and growth. Occasionally, special deposits were imposed to reduce the amount of free reserve and credit- creating capacity of the banks. Minimum cash ratios were also stipulated for the banks in the mid-1970s on the basis of their total deposit liabilities.

With the adoption of financial liberalization programme under the auspices of SAP and the changes from direct to indirect approach to monetary management, this study investigates the role of this programme on monetary policy in Nigeria. Specially, the basic question to be addressed in this study is: how effective is the conduct of monetary policy upon the liberalization of the financial sector in Nigeria? To what extent could monetary policy be relied upon for the achievement of macroeconomics objective in Nigeria?


These questions are very important because deregulation and changes in financial markets in recent years have had widespread implications for the conduct of monetary policy in several countries. Sample and well-behaved relationships between money and nominal income that existed under the regulated framework have apparently broken down in the changed financial environment.


With inflation in the financial sector in Nigeria, the assessment of its impact of this policy change on monetary policy becomes crucial. This is so because monetary policy is greatly relied upon for the achievement of macroeconomic objectives in Nigeria. It is an indisputable fact that the main objective of any country is to achieved growth in the economy which transcend into improvement in the standard of living of the people, to this end, efforts are made to maintain effectiveness of its monetary policy. This study, however, seeks to address the effect of monetary policy on monetary policy and its use as a tool used for the management of inflation within the household organization, society and the economy of Nigeria as a whole.



The study became relevant due to the increase in inflation in the developing countries which Nigeria is one of. Certain questions are required to achieve the aim of this research; these questions include:


1.      What are the roles of CBN in the Nigeria monetary policy?

2.      Does monetary policy have effect on inflation?

3.      Is there any relationship between monetary policies and Gross Domestic Product (G D P)?

4.      Does inflation has effects on individual industry and economy as a whole?

5.      Is monetary policy not effective in controlling inflation?

6.      Does monetary policy have effect on money supply?

7.      What is the view of the CBN concerning the value of the Nigeria currency (Naira)?



In Nigeria, development in the monetary policy since the eighties has been more positive but inflation on the other hand has been on the rise except for the fact that recently the Central Bank of Nigeria (CBN) had decided to regulate the system. Hence it is incumbent to carry out research such that can bring about a link between the monetary policy and management of inflation. Therefore the significance of the subject can be trace to:

·       The need to provide a link between monetary policy and inflation management.

·       The need to enhance the efficiency of Nigeria monetary policy is an effort towards meeting global standards.

·       The need to show monetary policy instrument and channel and the core principle of monetary policy.


There is no doubt that efficient and effective payment is a necessary prerequisite for the development and functioning of any economy. Indeed, an efficient monetary policy is most essential in any economy and determines to great extent its growth. Therefore, the Central Bank generally takes a keen interest and oversight in the functioning of a monetary policy in order to maintain the stability and growth of the financial system and to manage inflation.



The study of the role of monetary policy in the management of inflation in Nigeria is of paramount importance and the aim of the study is as follow:

i.       To show how effective and efficient monetary policy can generate economic growth and to evaluate monetary policy in Nigeria.

ii.       To provide an insight, based on the findings of this study, on measures improve monetary control in Nigeria.

iii.     To show the economic meaning and the importance of liquidity management through an effective and efficient monetary policy at ensuring stability and growth in the economy.

iv.     To identify an integration between monetary policy and inflation management.

v.       To investigate the relationship between demand for money and inflation.

vi.     To identify various variables that influences liquidity management in an economy, due to monetary policy and its component.


This study is aimed at reviewing and supporting the fact that a well-functioning monetary policy is of primary importance, especially in the implementation of monetary policy and particularly in inflation management.



The statement of the hypothesis will be based on two contrasting statistical parameters; the null hypothesis denoted by HO and the alternative hypothesis denoted by Ha. These hypotheses are to be used to ascertain the claims of the feasibility and positivity of the research work or when the demand is not met. The hypotheses for this topic are used as follow:


Ho: Underdeveloped financial structure market in the Nigeria economy does not limit the effectiveness of monetary policy.

HI:   Underdeveloped financial structure and market in the Nigeria economy limit the effectiveness of monetary policy.

Ho: Inflation does not have any effect on individual industry and economy as a whole.

H1: Inflation has effect on individual industry and economy as a whole.

Ho: Measure to stabilize the price does not have any effect on other objective of the economy.

H1:    Measure to stabilize the price has effect on other objective of the economy.

Ho: Measure to create employment does have any effect on other objective of the economy.

H1:   Measure to create employment has effect on other objective of the economy.



The methodology for this research work will take a secondary order, economic research centres and the central bank of Nigeria. It will equally cut across the technical individuals who in one way or the other had the stance to economic analysis theoretically and practically.


The banking world encyclopedia and the IMF shall be considered during the research work as they will be of strong advantage in the analysis of the research topic. Journals from these bodies shall be considered and term papers related to the topic will also be sought for information.



This research work is limited to the role of monetary policy in the management of inflation in Nigeria. It shall explain basically the essence of monetary policy and inter-relationship between monetary policy and inflation. It shall enrich its contents by making write-ups on those agencies involved in the banking sector, but mostly, it will base itself to the Central Bank Of Nigeria as well as the policies of government towards monetization and the influence of IMF and the World Bank.

The research work will not deal with any other monetary aspect of finance other than the ones stated above. It will not take into account any political cases involving finances or related course; it shall not talk about the laws following such conditions as well.



This study comprises of five chapters, chapter one will be introduction part which comprises of what exactly the topic is all about. In the chapter, the objectives, limitation, statement of the problems, significance of the study, statement of the hypothesis and an oversight of the methodology as well the organisation of the write-up are treated. Chapter two will comprise of the literature review which will contain both empirical and theoretical literature review. It will visit some advanced countries that had used the monetary policy as a mean to manage inflation as well as the Nigeria experience since it had begun to experience various means of monetary policies and the role it had played in the management of inflation. Book and web sites visited will be cited in this chapter. Chapter three will contain the methodology used for achieving the objectives stated earlier in chapter one. It will contain all the tools used for analysis and how they were employed as well as when it was employed.


In chapter four, the result of the research will be discussed and mathematical, statistical and analytical results shall be explained. Graphical illustrations and mathematical inferences will be stated as well to show how monetary policy can be used to achieve management of inflation. The final chapter will contain the conclusion derived from the research. It will contain all inferences drawn from the result obtained from the research carried out. It will also contain recommendation for future research. It will also contain recommendations made to government to take note when making polices, it will equally give information to the bank sector on how best the monetary policy they employ is and give advice on better methods.


1.10           DEFINITION OF TERMS.

Inflation: can be defined as a constant Increase in Price of commodity.


MONETARY POLICY: A monetary policy is a set of instructions and procedures used for the transfer of value and settlement of obligations arising from the exchange of goods and services within a defined market.


Management: Is defined as the act of running and controlling a business or similar organization using a particular rule or principle (Olayemi, 2002)

Hypothesis: is an idea or explanation something that is based on a few known facts but that has not yet been proved to be true or correct (Oxford advanced learner, 2002).


Globalization: is something that has to do with the whole world. It may also refer to something that has to do with the whole part of a country.


E-commerce: is the act of transacting business via the electronic medium, It is equally the process of buying and selling goods and service through the electronic means.


Deregulation: According to Investor Glossary, Deregulation is an act by which the government regulation of a particular industry is reduced or eliminated in order to create and foster a more efficient marketplace.


Deregulation is usually enacted to weaken government influence and forge greater competition (Weekly Trust, 2009).


Innovation: The term innovation refers to a new way of doing something. It may refer to incremental and emergent or radical and revolutionary changes In thinking, products, processes, or organizations (Wikipedia, 2009).


Conquest: Success in mastering something difficult









1.      O. J. Nnana & D M. Ajayi (2005): "The role of monetary policy in the management of inflation" CBN Bullion Vol. 129, No.1 Jan -Mar 2005


2       NNAMDI ASIKA (2004): Research Methodology in the Behaviour Science 2004


3.       Central Bank of Nigeria (1998); The Dynamics of Managing the Nigeria Financial system in The 21st century.


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