Monetary Policy and Its Price Stabilization Effects on the Prices of Building Materials

Abstract

Inflation has an influence on the general economic activities of the market system, and this includes the building materials market. The influence of inflation on the price of building materials results in variations in the financial planning and execution of a construction project, which hampers meeting the cost targets and maintain profit margin. It is the responsibility of government to regulate the movement of inflation through the use of Monetary Policies. The monetarist economists argue that the major cause of inflation is the increase in the supply of money in circulation. The Monetary Policy being the principal tool used by the government for price stabilization in mind, this study aims to examine the relationship between the inflationary rates and prices of building materials in the face of Monetary Policy. The study covers a period of ten years and considered twenty-four (24) major construction materials.The result shows that there is a significant relationship between the movement of the Monetary Policy Rate (MPR) and the inflation rate. A regression model of y=6894+0.314x, which imply that MPR controls price fluctuation in the general economy, this was not the case with the prices of building materials investigated. The regression of the prices of the building materials against the MPR showed no significant relationship; though the price fluctuated within the period. MPR did not show to have an effect on movement of building material price; hence MPR may not be an effective tool for price stabilization in the building materials market.

DOI: 10.5901/mjss.2015.v6n4p171