Project Abstract

<p> <b><b></b></b></p><p><b><b>This<br>work examined inflation targeting in emerging economies evidence from Nigeria.<br>This was motivated by the need to understand the adoption of inflation<br>targeting as a framework for the control of inflation in Nigeria and how it has<br>influenced productivity in Nigeria. Ex-post facto research design was adopted<br>which enabled the researcher to gather secondary data from CBN statistical<br>bulletin 2016 from 2005 to 2016. The data collected was analysed using multiple<br>regression results and this was done in order to achieve the following research<br>objectives earlier raised in the study to examine the relationship between<br>growth rate of money supply and inflation rate in Nigeria; to determine the<br>relationship between cash reserve ratio and inflation rate in Nigeria; to<br>access the relationship between monetary policy rate and inflation rate in<br>Nigeria; to examine the relationship between interest rate and inflation rate<br>in Nigeria; to determine the relationship between treasury bills rate and<br>inflation rate in Nigeria and to examine the relationship between productivity<br>and inflation targeting in Nigeria. From the analysis, the findings made<br>include that growth of money supply has a positive and significant relationship<br>with inflation; interest rate has a positive and significant relationship with<br>inflation rate; cash reserve ratio has a negative and significant relationship<br>with inflation rate and that both money supply growth and interest rate affects<br>real GDP in Nigeria. It was concluded that inflation targeting has no<br>significant effect on inflation rate but that the control of such aggregates<br>such as money supply and interest rate can help bring down inflation and that<br>inflation targeting impacts on productivity. Recommendations made include the<br>widening of the scope of inflation targeting, the effective control of both<br>money supply and interest rates in order to reduce inflation and to enhance productivity.</b></b></p><p><b><b><b></b></b></b></p><b><b><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p></b></b></b></b></b></b></b></b></b></b></b> <br><p></p>

Project Overview

<p> <b><b><b><b><b><b><b><b><b><b><b><b><b></b></b></b></b></b></b></b></b></b></b></b></b></b></p><p><b><b><b><b>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; INTRODUCTION</b></b></b></b></p><p><b><b><b></b></b></b></p><b><b><b><p><b>1.1 &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<br></b><b>Background<br>to the Study</b></p><p><b></b></p><b><p>In most countries of the world and particularly in<br>Nigeria, the economic policy makers such as Central Banks amongst others have<br>come to the realization of the need of pursuing price stability as their<br>primary objective. Price stability is generally assumed to mean having a low<br>level of price fluctuations and the achievement of stable inflation rate in an<br>economy. This situation has become necessary because of the inherent negative<br>effects of high inflation in an economy. To a developing economy like the<br>Nigerian economy, high inflationary trends would be considered disastrous if<br>not properly checked. These effects may manifest in the form economic downturn<br>and negative influence on the standard of living of the citizens.</p><p>In line with this opinion, the Central Bank of<br>Nigeria (2009) observed that the period covering from 1990 to 2000, the average<br>inflation rate had been above the double digit level (26%-51%) which rendered<br>most deposit rates negative in real terms. According to them, this also eroded<br>domestic savings and investments as well as real income. Suggestions by the monetary authorities in<br>Nigeria state that high rate of inflation in Nigeria before and in the early 21st<br>century was as a direct result of policies that focused on stimulating faster<br>rate of economic growth and development. The inflationary trend since<br>independence shows that inflation in Nigeria has attained higher levels more<br>than 40% especially in the early 1980s and 1990s and during this period the<br>economy witnessed several economic distortions.</p><p>Similarly, the control of inflation in Nigerian<br>shows that from one political administration to another, the Central Bank of<br>Nigeria (CBN) has tried to initiate various monetary and other policies in an<br>attempt to control inflation. However, in spite of all these efforts and<br>policies, inflation rate still remains high and unyielding with pronounced<br>implications on economic growth and development. High inflation rate has helped<br>to force up interest rate, thus decimating investments and reducing the real<br>values of aggregate consumer wealth (as government debt and money), and hence<br>inhibits and distorts consumer spending. It also has raised domestic prices<br>relative to foreign trade, inhibits exports and stimulates imports thus<br>depleting the nation’s scarce foreign reserves and worsening the balance of<br>payments. High rates of inflation also distort savings and that investors tend<br>to divert scarce resources from productive uses.</p><p>Furthermore, the stress on price stability or low<br>inflation as the main objective of monetary policy may not be that other goals<br>of macroeconomic policy, such as maintaining a high level of employment,<br>achieving sustainable economic growth and attaining favourable balance of<br>payments are of less essence but that it could only be comprehended that price<br>stability can later promote economic growth and attainment of full employment<br>level. Consequently, there is therefore, an emerging unanimity that Central<br>Banks can consistently promote sustainable economic growth objective by<br>pursuing sustainable price stability through inflation targeting as a policy<br>technique.</p><p>&nbsp;Inflation<br>targeting in this case refers to policy measure to direct inflation rate<br>towards an expected level using monetary tools such as interest rate to achieve<br>it. The actions of the Central Bank in this regard is expected to be very<br>transparent as this will enable investors to factor in possible interest rate<br>changes in their investment portfolios leading to a better economic stability<br>or fluctuations in price. It could then be established that inflation targeting<br>helps in stabilizing the financial system thus enabling reasonable level of inflation<br>rate in the economy. Inflation targeting since its adoption first in New<br>Zealand in 1990 have become promising that some Central Banks of the<br>industrialized and developing economies have declared that maintaining price<br>stability of the lowest possible rate of inflation is their only mandate(Riti<br>and Kama, 2015).</p><p>From early 1990s, many developed countries<br>especially in Europe and the Americas have moved towards implementing inflation<br>targeting (IT) as a framework for monetary policy while developing counties in<br>Nigeria especially Nigeria were not ready for it. In Africa, South Africa and<br>Ghana were the first to implement inflation targeting in 2005. The move to use<br>this framework by countries around the world has been attributed to several<br>factors but prominent amongst these factors is the strong determination to bring<br>down inflation rate to a minimal level to encourage domestic savings and<br>moderation in prices such that aggregate demand and income levels can be<br>improved. Nigeria had indicated its<br>intention to transit into inflation targeting as a framework for monetary<br>policy since 2005 based on the positive results to which the framework have had<br>on the development path of the countries that had adopted it. The country had a<br>smooth take-off of inflation targeting as the Central Bank of Nigeria (CBN) had<br>successively transited from its monetary targeting framework into that of<br>inflation targeting. This study attempts to provide an examination of the<br>impact of IT on economic performance in Nigeria and assess its relationship<br>with other macroeconomic variables to cross check their level of performance in<br>the country.</p><p><b>1.2 &nbsp; &nbsp; &nbsp; Statement of the Problem</b></p><p><b></b></p><b><p>The major<br>challenge of the Nigerian economy has been the issue of price instability. It<br>could be observed that price stability is not a major policy objective of the<br>monetary authority in the country over the years hence incessant increases in<br>price levels. This could be that the management of domestic policies in Nigeria<br>seem not to have a fair or better understanding of stabilization policies as<br>prices kept rising almost on daily basis to the detriment and impoverishment of<br>the citizens. At the same time wages were not increased commensurately as<br>frequently as the price levels were jumping. Again, this could it be that<br>nothing was being done to ameliorate the persistent rise in the prices of goods<br>and services within the domestic settings. During these periods it was expected<br>that the interest rates pattern and other policy instruments need to be managed<br>in ways that would not exacerbate high prices in the economy.</p><p>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; Difficult socio-economic situation arises at high<br>inflation rates. It becomes a device in deterring investments, causing high<br>poverty incidence, reduction in the real values of aggregate consumer wealth.<br>This distorts consumer spending by raising domestic prices above the reach of<br>most citizens and in comparison to foreign prices. This also inhibits exports<br>while stimulating imports to the detriment of the domestic economy as high<br>import would deplete the nation’s scarce foreign reserves and worsen the<br>balance of payments statement. It also discourages savings and investments<br>since there may not be effective demand for the produced items causing huge<br>inventory build-up. Inflation targeting could be seen to be the needed policy<br>measure that is needed to curb the menace of incessant price hike and hence the<br>study is to find out the impact of inflation targeting on the Nigerian economy<br>and where possible proffer solution as to the linkages to abate the effect.</p><p><b>1.3<br></b><b>&nbsp; &nbsp; &nbsp; Objectives of Study</b></p><p><b></b></p><b><p>Broadly,<br>the objective of this study is to examine inflation targeting in emerging<br>market economy: the Nigerian experience from 2005-2016. The specific objectives<br>are:</p><p>1. &nbsp; &nbsp; To<br>examine the relationship between growth rate of money supply and inflation rate<br>in Nigeria.</p><p>2. &nbsp; &nbsp; To<br>determine the relationship between cash reserve ratio and inflation rate in<br>Nigeria.</p><p>3. &nbsp; &nbsp; To<br>access the relationship between monetary policy rate and inflation rate in<br>Nigeria.</p><p>4. &nbsp; &nbsp; To<br>examine the relationship between interest rate and inflation rate in Nigeria.</p><p>5. &nbsp; &nbsp; To<br>determine the relationship between treasury bills rate and inflation rate in<br>Nigeria.</p><p>6. &nbsp; &nbsp; To<br>examine the relationship between productivity and inflation targeting in<br>Nigeria.</p><p><b>1.4 &nbsp; &nbsp; &nbsp; Research Questions</b></p><p><b></b></p><b><p>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; Based<br>on the objectives of the study, the research questions can be generated thus:</p><p>Is<br>there any relationship between growth rate of money supply and inflation rate<br>in Nigeria ?</p><p>1. &nbsp; &nbsp; To<br>what extent does cash reserve ratio influence inflation rate in Nigeria?</p><p>2. &nbsp; &nbsp; Does<br>monetary policy rate affect inflation rate in Nigeria?</p><p>3. &nbsp; &nbsp; Is<br>there any relationship between interest rate and inflation in Nigeria?</p><p>4. &nbsp; &nbsp; Does<br>any relationship exist between treasury bills rate and inflation rate in<br>Nigeria?</p><p>5. &nbsp; &nbsp; Does<br>inflation targeting have any impact on productivity in Nigeria?</p><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>1.5 &nbsp; &nbsp; &nbsp; Research Hypothesis</b></p><p><b></b></p><b><p>To<br>guide the success of the study, the following research null hypotheses (H0)<br>were formulated:</p><p>H01: There<br>is no significant relationship between growth rates of money supply, cash<br>reserve ratio, monetary policy rate, interest rate, treasury bills rate and<br>inflation rate in Nigeria.</p><p>H02: There<br>is no significant relationship between inflation targeting and real Gross<br>Domestic Product (GDP) in Nigeria.</p><p><b>1.5 &nbsp; &nbsp; &nbsp; Significance of the Study</b></p><p>This study has both theoretical and<br>practical significance. The findings of this study will help to add to the body<br>of knowledge on the management of inflation in Nigeria using inflation<br>targeting. This will help people understand what inflation targeting does in<br>the Nigerian economy. The practical significance of this study stems from its<br>value to some groups of people. These include the monetary policy officials of<br>Central Bank of Nigeria (CBN), officials of the Federal Ministry of Finance,<br>experts on economic and monetary matters, researchers and students.</p><p>To the officials of Central Bank of<br>Nigeria (CBN) and Federal Ministry of Finance, the study will help them work<br>towards the better implementation of inflation targeting policies in order to<br>make it work better. To experts on economic and monetary matters, this study<br>will enable them to map out further strategies through new resolutions to<br>strengthen inflation targeting in Nigeria. Finally to researchers and students,<br>this study will help them to become interested in this area and with that carry<br>out further research in this area.</p><p><b>1.6 &nbsp; &nbsp; &nbsp; Scope of the Study</b></p><p><b></b></p><b><p>The study is on assessing inflation targeting in<br>emerging market economy: the Nigerian experience from 2005 to 2016. The choice<br>of the period for the study is based on the period that inflation targeting was<br>introduced in Nigeria. Prior to this period, the Central Bank of Nigeria has<br>adopted different policy regimes in the monetary policy implementation ranging<br>from exchange rate peg, targeting various types of monetary aggregates and<br>presently inflation targeting. The main focus is how<br>inflation targeting has helped to reduce inflation rate and increase output<br>levels in Nigeria within this period of study.</p><p><b>1.7 &nbsp; &nbsp; &nbsp; Definition of Terms</b></p><p><b></b></p><b><p><b>Inflation:</b><br>This refers to a continuous or persistent rise in the price level.</p><p><b>Inflation Targeting:</b><br>Inflation targeting as a framework of constrained discretion in which the<br>constraint is the inflation target which may be a point or a range and the<br>discretion is the scope and flexibility to take account of economic and other<br>considerations.</p><p><b>Emerging Economies:</b><br>This describes<br>a nation’s economy that<br>is progressing toward becoming more advanced, usually by means of rapid growth<br>and industrialization. These countries experience an expanding role both in the<br>world economy and on the political frontier</p><p><b>Emerging Markets:</b><br>An emerging market is one that is in the<br>transitional phase from a developing country to a developed one.</p><p><b>Productivity:</b><br>Refers to the level of economic activities or level of output produced within a<br>given economy.</p></b></b></b></b></b></b></b></b></b></b></b> <br><p></p>