Table of ContentsTheory of InflationMonetarism, Money and InflationEmpirical Review on Monetary Policy and InflationTheory of InflationMonetary economic theories postulate that the velocity of the money supply is greater (a increase in the quantity of money supply) at the rate of growth in the level of production results in inflation. They therefore suggested the need for monetary policies in order to put an end to the high level of inflation. This view of monetarists is contrary to that of Keynesians who assert that inflation is the result of pressures in the economy expressed in prices, while it has further been asserted that the pressure is caused by increase in the money supply in the economy. plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get the original essay Keynesians therefore argue that tax changes cause inflation. Keynesians further subdivided the causes of inflation into three main groups, namely: cost push factors, demand pull as well as built-in or adaptive expectation factors. These three groups are generally known as the triangular model of inflation. As Keynesians explain in more detail, increased public and private spending, increased input prices, natural disasters, and spiraling prices and wages are responsible for an increase in the level of inflation. . Enzim (2005), however, shows using econometric analysis that monetary factors cause inflation in emerging markets such as Nigeria. The result of his findings is in agreement with the monetary theory school of thought, whether inflation is monetary inflation or price inflation. The underlying claim is that monetary policies have an effect on price inflation by influencing existing financial conditions in the economy. Savings, deposits, investments, lending/borrowing, the proportion of funds intended to meet the demand for goods and services, known as financial terms, adjust to the different rates applied by the authorities of regulation for the movement or use of funds. Monetary authorities use their regulatory tools to control or regulate the quantity of money available in circulation through different financial institutions such as commercial banks among others. The size of money available for people to use in the demand for goods and services is what monetarists call the quantity of money. Since most of the activities of banks are short-term in nature, it follows that lending and deposit activities will affect long-term economic activities. The Fischer quantity therefore explains the link between short-term (monetary) and long-term (fiscal) factors. which influence inflation. Fischer's theory is that inflation has a link between real and nominal interest rates. Nominal interest rates refer to the short term while real interest rates refer to the long term. Production, aggregate supply, and demand for goods and services are all long-term economic activities that respond to any adjustments in short-term economic activities. The Fischer effect also states that real interest rates are equal to nominal interest rates when the expected inflation rate is deducted. . This therefore implies that the real interest rate increases as inflation rates decrease, while keeping the nominal interest rate constant. The interest rate is the underlying factor in the Fischer effect linking theoriesKeynesian to monetary theories of inflation. Monetarism, Money and Inflation Monetarism focuses on the long-term supply side of economics which is described as the quantity theory of money and neutrality. (independence of the level of money supply in the long term, which is also based on the concept of neutrality of money. The quantity theory of money relates inflation and economic growth by equating the total amount of existing money to the total amount of money supply. spending in the Aksoy (2009) also suggests that controlling the quantity of money supply will help curb a high rate of inflation in the economy Milton Friedman proposed that inflation is the product of a. increasing the velocity or money supply at a rate greater than the economy's rate of output growth Milton Friedman also challenged the concept of the Philips curve Friedman's argument was based on an economy in which people. have to pay twice as much for goods and services after the costs of goods and services had to double and since their salaries are also twice as high this makes inflation harmless; Monetarism suggests that in the long run, general prices of goods and services are only affected by the rate of growth of the money supply while it has no effect on the rate of economic growth. If the rate of economic growth is lower than the growth of money supply, then inflation results. Empirical Review of Monetary Policy and Inflation Empirical studies on the impact of monetary policies on inflation have been carried out using both New Keynesian economics and monetarist theories. , via the application of monetary or credit aggregates, the consumer price index as well as the quantity theory of money. Adebiyi (2009) studied the relationship between inflation and monetary policy in Nigeria and Ghana using a vector autoregressive model with some financial variables such as money. supply, interest rate, price and exchange rate, the result shows that inflation is an inertial phenomenon in Nigeria and Ghana, and monetary innovations are not strong and statistically significant in determining prices compared to price shocks. Gbadebo and Mohammed (2015) examined the impact of monetary policy on the inflation rate in Nigeria. The scope of data adopted for the study extends from 1980 to 2012 with the use of time series data, tested using cointegration analysis and error correction model. The study identified oil price, money supply and exchange rate as the main causes of inflation in Nigeria. The study also found that money supply has a positive and significant impact on inflation in the short and long term. Their study concluded that monetary impulses cause inflation in Nigeria. Emerenini and Eke (2014) examined the determinants of inflation in Nigeria between the periods 2007 and 2014. They adopted the OLS technique and data co-integration analysis test. The study found that the money supply and exchange rate had a significant positive impact on inflation, while the Treasury bill rate did not. Furthermore, Raymond (2014) conducted a study examining the impact of money supply, interest rate, cash reserve rate, and liquidity ratio. and the exchange rate on inflation in Nigeria. An OLS technique was adopted with data covering the periods 1980 to 2010. It was revealed in the study that liquidity ratio and interest rate were the effective exchange rate on inflation in Nigeria. Akinbobola (2012) examined the impact of money supply and (2012).