THE MONETARY FACTORS IN THE INFLATIONARY PROCESS IN NIGERIA: 1969-1989

THE MONETARY FACTORS IN THE INFLATIONARY PROCESS IN NIGERIA: 1969-1989

Abstract:

The relative importance of the monetary policy vis-avis the fiscal policy in controlling the economic variables has generated a lot of debate and contention in the economic discipline. Of recent again, is the debate between the monetarists and structuralists of the best way to tame the price level movements in an economy. The monetarists have come out to say that the best way to put the price level under control is to manipulate the monetary variables and inflation will cease, or at worse, reduce. On the other hand, the structuralists do not completely agree with the stance, and that inflation is majorly caused by the structural bottlenecks, which even go a step further to hampering the success of the monetary variables’ manipulation. The two of them seem to be talking some sense, but which is more appropriate for the Nigerian setting is the main issue. A number of work on the monetarist approach to inflation have been carried out and with emphasis on the money supply as it affects inflation, and it has been found that controlling the money supply and the attached monetary variables will, to a large extent, moderate inflation rate in Nigeria. The thesis employed a reduced form of a model to provide the empirical insight into the relationship between money supply, Gross Domestic Product, the budget deficit, vii exchange rate, foreign price and inflation, using Nigerian data for the period 1969-1989. The thesis has shown that money supply significantly affects the movements of the price level. It shows also that the budget deficit, output level, and exchange rate affect the price level. Noteworthy is the impact of money supply on inflation in the 1970s, when the revenue from oil was highly monetized. Testing the impact of all the variables on the price level, they tend to be swallowed up by the money supply variable. But when their impacts are tested singly, they seem to perform better. The impact of exchange rate on the inflationary process has not been very significant when combined with all the variables and under the period in view. This is because the exchange rate became significant in the last half of the 1980s. When the explanatory variables are regressed upon by the price level, they tend to perform better than when inflation, as defined, is regressed on their changes. The implication of this is that the monetary variables are significant in price determination but do not contribute to inflationary process as much. Therefore, some other factors might have been responsible for the changes in the price levels which might not be wholly monetary. Hence, the work was concluded on the note that the monetary factors do not significantly affect inflation, and that government efforts should be geared towards determining the main causal factors for correct policy formulation.

THE MONETARY FACTORS IN THE INFLATIONARY PROCESS IN NIGERIA: 1969-1989

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