Introduction
Price stability has become one of the most desirable objectives of macroeconomic management. Economists all over the world are unanimous in their affirmation of this position. This is because, frequent price fluctuation, whether persistent increase (inflation) or decrease (deflation), create risks and uncertainties in an economic environment. Fielding (2008) reveals that price instability creates uncertainties about future prices, increases business risks and unanticipated changes in the distribution of wealth. It is important to know that, risks and uncertainties make planning by both consumers and producers difficult, by implication, lead to a fall in the efficiency of the free market in allocating scarce resources and solving other societal and/or economic problems. Whenever prices rise above interest rate of savings, savings is discouraged. This however led to a fall in loanable funds for investment, and consequently, a fall in potential output and employment. Interestingly, steady and gradual changes in the price level also come with some desired implications. Chiefly among these is its ability to serve as impetus for growth if properly controlled. There is a general believe that at least 3 percent steady growth in the price level in an economy would help boost economic growth. This position is based on the premise that investors are motivated to commit their scarce resources into production of goods and services when they expect a steady rise in the prices of these goods and services. On the other hand, deflation benefits the consumers. It increases their level of demand and consumption and, as a result, increases their standard of living. However, as rightly opined by Berlemann and Nelson (2002), the negative distributional and allocative effects of price instability are typically supposed to dominate the positive ones. There is therefore a need to stabilize prices in such a way that it retains its powers to boost economic growth and employment while ensuring it does not create market risks uncertainties. This has been the target of fiscal and monetary policy instruments which have been jointly administered by most economies today in promoting the macroeconomic goal of price stability.
The Nigerian economic environment is experiencing its own unfortunate share of uncontrollable price fluctuations. Till date, inflation continues to be one of the most challenging of all the numerous economic problems faced the by Nigeria economy.
Kumapayi et al. (2012) attributed Nigeria’s inflation problem to the oil boom of 1970s, and the rise in government expenditure in the wake of the government’s determination to enhance post-civil war reconstruction and development. The implication was a rise in domestic money supply without a corresponding increase in domestic production of goods and services. This adversely affects funds mobilization and disbursement for investment, thereby adversely affecting output and employment. This result is an uncontrollable rise in domestic prices of goods and services. Current available economic indicators, which present her as a poverty engulfed country and an unfavourable business environment, point to this fact.
Policy implementations which seek to address Nigeria’s inflation problem, by successive governments, can be grouped under fiscal and monetary policy. However, over the years, undue reliance has been placed on fiscal policy rather than monetary policy with very little satisfactory results (Darrat, 1984). There was therefore the need to restructure the money market in order to enhance the role of monetary policy instruments in macroeconomic management in Nigeria. This was the core of the financial sector liberalization (deregulation) exercise which came under the auspices of the Structural Adjustment Programme (SAP) of 1986 (Ajisafe et al., 2002).
Prior to the deregulation exercise, the financial sector operated under financial regulations and interest rates were said to be repressed. Ceilings were imposed on deposit and lending nominal interest rates. The pre-reform period (1960-1986) is considered a period of financial repression and was characterized by a highly regulated monetary policy environment in which policies of directed credits, interest rate ceiling and restrictive monetary expansion were the rule rather than
exception (Soyibo and Olayiwola, 2000). The financial liberalization exercise was aimed at enhancing the development of the money market, thereby laying a foundation for proper monetary policy implementation. This, it was hoped, would help control money supply and consequently, control inflation. The functions of the Central Bank, as the apex of the money market, were also boosted. According to Iyaji et al. (2012), the Central Bank of Nigeria (CBN) was to implements policies through Deposit Money Banks (DMBs) that guarantee the orderly development of the economy through changes in money supply. The target was to control inflation at a rate which would not negate the objectives of economic growth and employment.
Unfortunately, many years after the introduction of SAP, price instability still maintains top ranking position on the list of economic problems affecting the Nigerian economic environment. Even the CBN annual single-digit inflation rate target remains a mirage till this day. This raises questions about the effectiveness of monetary policy in controlling inflation in Nigeria. It is against this backdrop that this research sought to investigate the role of monetary policy in attaining the objective of price stability in Nigeria. More specifically, attempts were made to determine the relationship between money supply and the price level in Nigeria. The estimation technique of this research was developed around the methodology of Vector Autoregression (VAR) model. It is the expectation of the researcher that this study shall boost already existing literature in this area of economics, and that the findings of the study shall lay a sound foundation for researchers who wish to advance this study by attempting to provide answers to the inconclusive findings that the work has presented. Finally, the study would provide monetary policy authorities with information on the effects of monetary policy actions in Nigeria. This would serve as a guide in the implementation of monetary policy guidelines that promote sound macroeconomic management in Nigeria.