Using quarterly data, Osakwe (1983) attempted to verify the amount of government expenditure that affected money supply in the ten-year period 1970 – 1980. Significant statistical evidence obtained from the analyses showed strong relationship between increases in net current expenditure and growth in money supply, on the one hand, and growth in money on the other hand. Further increase in money wage rate and money supply (with a lag in effect) was identified as the two most important factors that influenced the movement of prices during the period.
The quantitative impact of monetary expansion and exchange rate depreciation on price inflation in Nigeria was the focus of Egwaikhide et al (1994), who used time series econometric techniques of co- integration and error correction mechanism (ECM). They concluded that Nigerian inflation seems to find explanation in both monetary and structural factors and that both the official and parallel market exchange rates exert upward pressure on the general price level. They recommended the use of a combination of policy measures to put inflation under effective control in Nigeria.
Ajakaye and Ojowu (1994), using an output-input price model investigated the impact of the exchange on the structure rate depreciation witnessed in Nigeria between 1986 and 1989 on the
structure of sectored prices under alternative pricing regimes. They further simulate and analyze empirically the impact of exchange rate depreciation under three different mark-up pricing regime: a fixed mark-up pricing regime, a flexible pricing regime with rationale expectation, and a mixed mark-up pricing regime. It was also found that although exchange rate depreciation under the universal flexible mark-up pricing regime with rational expectation will contribute reasonably to the changes in the structure of sectoral prices, the associated inflationary consequences are the highest. Thus, prices in all sectors are determined on the basis of actual and anticipated increases in the cost of imported inputs on account of exchange rate depreciation.
In a study for African Economic Research consortium (ERC), Kilindo (1997) tried to increase the understanding of Tanzanian inflation by investigating the links among fiscal operations, money supply and inflation.
Finding a strong relationship among the three, he recommended the adoption of a restrictive monetary policy in which the supply of money must be constrained to grow steadily at the growth of real output. In another study for AERC, Barungi (1997) examined the determinants of inflation in Uganda. His paper analyse the relative importance of monetary, cost-push and supply-related cause of inflation. He concluded that inflation in Uganda is persistently a monetary phenomenon.
A second possible explanation for the varied inflation performance in Nigeria can be found in recent literature on monetary regimes for open economies. A key notion arrived at in this literature is that it is not possible for a country open to international capital flows like Nigeria to have both a stable exchange rate and monetary policy directed at domestic goals like price stability. The so called impossible trinity (Fischer, 2001). Sooner or later conflicts between the two goals arise, jeopardizing the attainment of one or even both objectives. One particular aspect of the research is that trying too hard to keep exchange rates stable when the economy is open and subject to short- term capital flow can be risky.
International evidence confirms this notion. As stressed in Fischer (2001), for example, each of the major international capital market- related crises (e.g. Mexico in 1994, Thailand, Indonesia and Korean in 1997, Brazil and Russia 1998, and Argentina and Turkey in 2000) involved some sort of fixity of the exchange rate.
As a result, a consensus appears to have now emerged that adjustable pegs and other soft pegs (including arguably, managed floats explicitly directed at maintaining the exchange rate around a certain level, such as in the case of Nigeria), can be dangerous arrangements for open economies subject to international capital flows (Khan (2003)). Viable alternatives boil down to the corner solutions of either completely giving up monetary policy and national currencies by evolving towards official dollarization/eurozation (basically a form of unilateral currency union) or strengthening national currencies by use of an inflation target combined with a float.
The fall in oil prices from their record highs of last summer accounts to, in effects, a tangible economic stimulus program. Unlike government stimulus spending programs, the fall in oil prices required no deficits, and meant an immediate infusion of money into the pockets of private and corporate consumers. Inversely, the return to higher energy prices at a time in which the world is experiencing its worst economic crisis since the great depression of the 1930s, would in terms of impact, is a major task penalty being imposed on any attempt at a sustained recovery. In essence, the entire global economy being held hostage to the volatile pricing forces of an essential commodity. Clearly, when it comes to oil price levels the market does indeed rule.
