THE IMPACT OF MONETARY POLICY ON INFLATION IN NIGERIA
The major problem pervading the face of the world after the Second World War was the problem of inflation. High level of inflation is a deadly disease that should not be allowed economy because it renders business ineffective and causes lay-off of some workers and also underpins ineffectiveness in economic activities. Before the problem of inflation occurred after the Second World War as noticed by John Maynard Keynes, unemployment has been the existing problem and after 1970, these two problems merged together and economist tagged stagflation. This problem posed a serious challenge to both economists and the policy makers, in the process of finding solutions a new macroeconomic problem emerge known as rational expectation (Ratex) trying to solve the problem of a new economic phenomenon. Without wasting much of time on this a clear explanation is given below. How inflation occurred will be discussed below. The current phase of low global inflation is comparable with the pre- world war two phenomenons when inflation rates across region were quite low. In the post- World War II period however price levels showed a clear upward trend, with inflation rates rather than price level clustering around a stationary level following price shocks. In particular, the collapse of the Bretton woods arrangement was associated with a surge in inflation during the 1970’s. Commodity price shocks, especially oil prices, coupled with expansionary demand management policies including Vietnam- were related fiscal expansion in the US provided a significant impetus to global inflation. The belief that there existed a stable long- run tradeoff between inflation and output as well as overestimated of potential output also contributed to the accommodative stance of monetary policies this period. With inflation in double digits deliberate disinflation strategies were put in place in a number of advanced economies during the 1980’s and these were successful in reducing inflation. In particular co- ordinated fiscal and monetary policies were deployed to curtail demand pressure in the economy. In a case of Nigeria situation, monetary and fiscal policy has been the major tools used in combating the problem of inflation which is now widely agreed that monetary policy can contribute to sustainable growth by maintaining price stability. Monetary policy in an underdeveloped country like Nigeria plays an important role in accelerating development by influencing the cost and availability of credit, by controlling inflation and by maintaining balance of payment equilibrium. As development gains momentum, an appropriate monetary policy is essential to provide an elastic credit supply to meet the requirement of a growing volume of trade, a rapidly increasing population and an expanding monetized sector. The attainment of price stability becomes the overriding concerns of the central bank indeed; some degree of price inflation is regarded as a normal development a growing economy, so long as such price increases remain within the range of low single digits. Giving lower range single digit percentage increases in the general price level, price stability is obtained when economic agents (household and firms) no longer significantly take into account the expected change in the general price level in their current economic decision making. The attainment of price stability in an economy is however not an easy enterprise. 1.2
The achievement of low and stable inflation is one important aim of central banks all over the globe. However, the cost of achieving low and stable inflation include distributional costs in which borrowers gain at the expense of savers and resources cost in which economic agents are committed with considerable resources that could have been more efficiently and beneficially utilized. Macroeconomic cost also include a situation in which producers may mistake a...
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