THE EFFECTIVENESS OF MONETARY POLICIES IN THE NIGERIAN ECONOMY

Abstract

The study examined the effectiveness of monetary policy on the Nigerian Economy. The objectives were to determine factors monetary policy that contributed to the growth of Nigeria economy. It made use of secondary and primary data, from Central Bank of Nigeria statistical Bulletin, Volume 21, 2010 and employed the Chi-squares method of statistical analysis. It was found out that government revenue had a positive impact and statistical significant on gross domestic product. Also shown that government expenditure was positively significant on the growth of Nigeria Economy. The second model depicts that money supply had a positive impact on gross domestic product and it discovered that this variable was statistically significant. Exchange rate variable had a positive impact on the performance of Nigeria economy. The finding revealed that inflation had a positive impact but there was no significant relationship between inflation and gross domestic product. It therefore suggests that government should increase the number of fiscal policy instruments over and above the ones currently in use.

 

TABLE OF CONTENT

Title page

Approval page

Dedication

Acknowledgment

Abstract

Table of content

CHAPETR ONE

1.0   INTRODUCTION 

1.1        Background of the study

1.2        Statement of problem

1.3        Objective of the study

1.4        Research Hypotheses

1.5        Significance of the study

1.6        Scope and limitation of the study

1.7       Definition of terms

1.8       Organization of the study

CHAPETR TWO

2.0   LITERATURE REVIEW

CHAPETR THREE

3.0        Research methodology

3.1    sources of data collection

3.3        Population of the study

3.4        Sampling and sampling distribution

3.5        Validation of research instrument

3.6        Method of data analysis

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

4.1 Introductions

4.2 Data analysis

CHAPTER FIVE

5.1 Introduction

5.2 Summary

5.3 Conclusion

5.4 Recommendation

Appendix

 

 

 

 

 

 

 

 

 

CHAPTER ONE

INTRODUCTION

• Background of the study

Monetary policy constitutes the major policy thrust of the government in the realization of various macro-economic objectives. Essentially, monetary policy refers to the combination of discretionary measures designed to regulate and control the money supply in an economy by the monetary authorities with a view of achieving stated or desired macro-economic goals. Another point of view posits that monetary policy refers to any conscious action undertaken by the monetary authorities to change or regulate the availability, quantity, cost or direction of credit in any economy, in order to attain stated economic objectives (Nwankwo, 2000). Monetary policy is designed to influence the behaviour of the monetary sector, this is because changes in the behaviour of the monetary sector influence various monetary variables or aggregates. In effect, the monetary policy in force at any point in time, affects the level of money supply either by expanding it or through contraction of same. It also influences the level and structure of interest rates and thus the cost of funds in the market, depending on the prevailing economic conditions. The regulation and control of the volume and price of money is the discretionary control of money-discretionary in the sense that it is made at the instance of the money authorities. Monetary policy affects the non-bank publics’ holding of real and financial assets in the system. It can thus sustain a divergence between the non-bank publics’ desired portfolio holding (Ajaji, 2008). Monetary policy as a tool of economic stabilization was given by Milton Friedman who held that only money matters, and as such, monetary policy is a more potent instruments of stabilization that fiscal policy (Nzotta, 2004). Monetary policy is one of the macroeconomic management tools used to influence outcomes in the real economy to its desired direction. The basic goals of monetary policy are the promotion of stable prices, sustainable output and employment. In macroeconomic theory, monetary policy is expected to affect the real economy through movements in interest rates which would alter the cost of capital and investment in the productive sector. According to Mishkin (1996 and 2007) monetary policy influences the economy through a variety of channels — interest rates, credit and/or bank lending, asset prices via exchange rates, equity and housing prices. Investigations into the effect of monetary policy on the economy has continued to generate active research interest because the channels through which shocks are transmitted changes with developments in both global and the domestic economy. In recent times, increasing attention has focused on the sectoral effects of monetary policy given that sectors respond differently to monetary policy shocks. This has implications for macroeconomic management as monetary authorities have to weigh the consequences of their actions on various sectors of the economy. For instance, the tightening of monetary policy might be considered benign from the general perspective, yet it can be viewed as excessive for certain sectors of the economy. If that is true, then monetary policy should have strong distributional effects to the economy. According to Alam and Waheed (2006), understanding the sectors that are affected adversely by monetary tightening for example, provide valuable policy information for the monetary authority. Such information helps to uncover the underlying nature of transmission mechanism of monetary policy actions. Understanding the responses of the disaggregated components of the real economy is important for a number of reasons. A disaggregation is imperative given that different sectors have different capital intensities that generate different responses in sectoral output from monetary policy. These differences in responses are largely disguised at an aggregate level thus making the disaggregated approach more informative than aggregate method for the purpose of analyzing the transmission mechanism of monetary policy (Dedola and Lippi, 2005).

However, more importantly is that the effective management of the monetary policy is a fundamental pre-requisite in ensuring adequate liquidation in the banking system and sectoral credit allocation to the sensitive. Sectors of the economy such as: power, agricultural, aviation, SMEs, etc. The above therefore, shows that monetary policy management goes beyond price stability, particularly amongst developing countries, but with a dual mandate: price stability and sustainability of economic growth. Monetary policy influences the level of money stock and/or interest rate i.e. availability, value and cost of credit inconsonance with the level of economic activity, Ibeabuchi (2007). Macroeconomic aggregates such as output, employment and prices are, in turn, affected by the stance of monetary policy through a number of ways including interest rate or money; credit, wealth or portfolio, and exchange rate channels, Akhatar (1997), CBN (1995). This aptly means that Monetary Authority applies discretionary power to influence the money stock and interest rate to make money either more expensive or cheaper depending on the prevailing economic conditions and policy stance geared towards achieving price stability. Wrights man (1976) succinctly puts it thus; monetary policy is nothing more than deliberate attempt to control the money supply and credit conditions for the purpose of achieving certain broad economic objectives. In general, most Monetary Authorities or Central Banks have been saddled with controlling inflation; maintaining a healthy balance of payments position to safeguard the external value of the domestic currency and promoting economic growth

• STATEMENT OF THE PROBLEM

One of the major objectives of monetary policy in Nigeria is price stability. But despite the various monetary regimes that have been adopted by the Central Bank of Nigeria over the years, inflation still remains a major threat to Nigeria’s economic growth. Greenspan (2003) observed succinctly that “Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape” within the Nigerian monetary environment, data „robousity‟; data transmission mechanism and fiscal environment are notably found as her greatest challenge and uncertainty. This has become particularly interesting because according to Ibeabuchi (2007), the Nigerian external sector (balance of payment) via change in net foreign assets; government budget (net credit to government) influence monetary survey as much as the real growth of the economy and prices. Okorie (2009) observed that monetary data that as a component of monetary policy proposals are often subject to frequent revision together with non-availability and quality concerns of non-monetary data such as real sector statistics. He further opined that transmission problem of monetary data is peculiar to most developing countries of which Nigeria is not an exception. One of the peculiar challenges of transmission channels is the „obsolesce‟ of the channel; relevant, and/or that the assumed magnitude of impact could be wrong by some significant Nigeria. This incidence is high, particularly for the fact that the structural relationship often subsisting amongst developing economies changes frequently, e.g. what constitute money has been expanded by the introduction of technology-backed proliferation of financial products which seemingly alter the empirical relationship between economic activity, inflation and the broad money (M2) in Nigeria, Okorie (2009). Finally, fiscal surprises have been seen to undermine monetary policy substantially, for instance, in the event of fiscal tax surface, monetary policy is expected to immediately become reasonably investment to maintain both internal and external balance. From the foregoing, therefore, the study’s challenge is therefore how best to manage the uncertainties in such way as to continue to pursue the basic and primary function of monetary policy for efficient price stability and sustainable economic growth.

• OBJECTIVE OF THE STUDY

The objectives of the study are;

1. To ascertain the effect of monetary policy on the economic growth of Nigeria
2. To evaluate the impact of money supply on price stability and growth
3. To examine the impact of financial deepening on growth
4. To examine the impact of interest rate on growth
   • RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀:  there is no effect of monetary policy on the economic growth of Nigeria

H₁: there is effect of monetary policy on the economic growth of Nigeria

H₀²:  there is no impact of money supply on price stability and growth

H₂:  there is impact of money supply on price stability and growth

• SIGNIFICANCE OF THE STUDY

Most theories of economic stabilization revolve around monetary policies. This explains why several instruments have been experimented in Nigeria since 1986. Ogun and Adenikinju (1995) observed that money supply growth averaged about 33% in 1991 – 1980 and 13% in 1981 – 1989, inflation appears to have moved in line, with respective levels of 19% and 16% in the last two decades. Secondly, the explosive stage of Nigeria’s inflationary experience appears to be in the 1973 – 1975 period which coincides with the period of the first oil shock of the 1970s, between 1973 and 1974 alone; the country’s foreign exchange receipts grew at the unprecedented rate of about 113%. It was further noted that the monetary authority appears to have relied almost exclusively on commutation of foreign exchange receipts into domestic expenditures in the oil boom period but resolved to deficit financing in order to sustain the expansionary monetary impulse in non-oil boom years; similarly, inflationary financing was experienced leading to negative real deposit interest rate, hence, decline in the velocity circulation of money supply as a result of fall in the efficiency of money in the production processes

• SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the effect of monetary policy on the economic growth of Nigeria. The researcher encounters some constrain which limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

 

DEFINITION OF TERMS

MONETARY POLICY: Monetary policy is the process by which the monetary authority of a country, typically the central bank or currency board, controls either the cost of very short-term borrowing or the monetary base, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

ECONOMIC GROWTH: Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study

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