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PROJECT TOPIC:IMPACT OF MONETARY AND FISCAL POLICIES ON THE RATE OF INFLATION IN NIGERIA SINCE 1986

IMPACT OF MONETARY AND FISCAL POLICIES ON THE RATE OF INFLATION IN NIGERIA SINCE 1986

CHAPTER ONE

   INTRODUCTION

1.1  BACKGROUND OF THE STUDY

it is about 21 years ago today since the introduction of a deregulated  economic system (ie allowing the market forces to determine the interest rate) in Nigeria ever since the inflation has  steadily been on increase in the economy. Owing to this development, real economic growth has not increased to an optimal level. In order to remedy this undesirable economic syndrome, several government policies have been put in place.  Such economic policies include monetary and fiscal, attracting different instruments for the purpose of this study, only interest rate and government expenditure will be analyzed as instruments of monetary   and fiscal policies

Monetary  policy can be defined as that part of economic policies  which regulates  the level of money or liquidity in the economy in order to achieve some desired policy objectives, such as the control of inflation. (Bannock etal 1978: 309). It uses specific instrument like the open market operation (OMO), interest rate, special Bank Reserve Ratios, Exchange Rate (foreign), special Directives and moral suasion. According to Anyanwu (1995), “fiscal policy is taken to ref to that part of government policies concerning the raising of revenue through taxation and other means and deciding on the level of and pattern of expenditure for the purpose of influencing economic activities or attaining some desirable macroeconomic activities or attaining some desirable macroeconomic goals”. Fiscal policy therefore, uses taxation, borrowing (through balanced, surplus and deficit budgeting) as major instruments. Precisely, all the above mentioned instruments of monetary and fiscal policies will be analyzed in this study as an effort to curtail inflation. What  then is inflation?

According to Owosekun and Odama, (1982) “inflation is a sustained upward trend in the level of prices”. Adewunmi and Awoseka (2982) in their own view, approached inflation from the conceptual frame work of its cause, and opined that, it is the process resulting from the competition in attempting to maintain total real income, total real expenditure and total output at a level which has become physically impossible or attempting to increase any of them to a level which is physically impossible.

IMPACT OF MONETARY AND FISCAL POLICIES ON THE RATE OF INFLATION IN NIGERIA SINCE 1986

 

Generally speaking, inflation refers to a process whereby, prices of goods and services rise steadily resulting in diminishing purchasing power of a given nominal sum of money. There are many types of inflation. Examples include, cost-push inflation, demand –pull inflation, Running inflation and hyperinflation. Essentially, the introductory background of inflation has been given to afford both the researcher and the reader an opportunity to appreciate the Nigerian practical situation in the period under review.

It is intended to extensively analyze the impact of government economic policies (monetary and fiscal policies) on the rate of inflation in Nigeria since 19 years of a deregulated economic era. At the end of this research, such questions stated below should have been answered.

  • Why is inflation steadily on the increase, despite the intensive monetary and fiscal measures?
  • Are all the theories of economic stabilization applicable to the Nigerian economy?
  • Are there problems inherent in the government policies on economic stabilization?, and
  • Are there alternate policy measures to the conventional theories?.

Primarily, this research study has been designed to review existing literature on conventional theories on economic stabilization with emphasis on interest rate and government expenditure in relation to inflation. A careful synthesis will be drawn from the classical and Keynesian boundaries. The overriding principle of literature review will be within the context of theories, empirical evidence and practical realities of Nigeria economy.

STATEMENT OF THE PROBLEM

Since the introduction of economic deregulation in Nigeria, inflation has become one of the major macroeconomic problems facing the economy. The government has introduced a lot of policy measures to control inflation in the country. Prominent among the measures are monetary and fiscal policies. Meanwhile, interest rates and government expenditure are the most frequently used instruments to achieve the stabilization goal of afore mentioned  monetary and fiscal policies. Despite the intensified use of the policies, the rate of inflation in Nigeria is still very high . several questions have come to the minds of Nigerians as to whether government economic policies are not effective  in the curtailment of inflation. In the light of this crucial question, the researcher will attempt to see whether high interest rates can as well reduce the rate of inflation.

IMPACT OF MONETARY AND FISCAL POLICIES ON THE RATE OF INFLATION IN NIGERIA SINCE 1986

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