Full Project – MONETARY POLICY AS A TOOL OF ACHIEVING PRICE STABILITY IN THE NIGERIA ECONOMY

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ABSTRACT

The subject matter of inquiry is “Monetary Policy as a tool of Achieving Price Stability in the Nigerian Economy”. The study therefore examined the influence of money supply Monetary Policy Variable on Consumer Price Index (CPI), the effect of interest rate Monetary Policy Target Variable on domestic private investment and impact of money supply on Gross Domestic Product Proxy for economic growth for the periods 1991 to 2007.

The research design adopted in the study is the Correlation Research Design. Economic application was used for the analysis of relevant relationships and the Ordinary Least Square [OLS] Regression Technique was employed for estimation purposes.

The estimates of relevant functions were appraised on A-Priori theoretical expectation, Statistical and Econometric grounds.

The study suggests that Monetary Policy has significant influence on the direction of aggregate prices in the economy.

Again Monetary Policy has significant nominal impact on economic growth in Nigeria.

However, the study shows Monetary Policy has not influenced investment through interest rate. Incidentally, the bane of Monetary Policy performance through its interest rate channel is due to the huge presence of the government in the money market for fund borrowing.

The study therefore recommends that federal government through the Central Bank of Nigeria evolve appropriate policy to discourage the government (state and otherwise) participation in the money markets as borrower among others.

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The central bank (CBN) of Nigeria has the obligation to formulate and execute monetary policy to promote stability in the country. To achieve this, the governor of central bank of Nigeria is required to make proposal to the federal republic of Nigeria, through finance minister, who has the power to accept or amend such proposals.

The central bank of Nigeria (CBN) is also empowered by the two enabling laws to direct the banks and other financial institutions to carry out certain duties in pursuit of approval monetary policy. The monetary policy to be pursued is therefore detailed out in the form or guidelines to all banks and financial institutions. The guidelines are generally operated within a fiscal year; both the element could be amended in the course of the year.

Non-compliance with specific provisions in the guidelines usually attract penalty.

In general term, monetary policy refers to the combination of measures designed to regulate and control the volume, cost availability and direction of money and credit in an economy.

According to Anyanwu (1993) it is deliberate effort by monetary authorities (CBN) to control the money supply and credit condition, for the purpose of achieving certain broad economic objectives.

As Akatan (1993) observed, monetary policy in Nigeria context are economic actions of the central bank of Nigeria (CBN) that affects the availability and cost of commercial and merchant banks reserves balances and by the overall monetary and credit conditions in the economy.

An increase in the supply of money would result to an increase in demand for goods and services, which would cause rising prices or a deterioration of the balance of payments position.

On the other hand, an inadequate supply of money could induce stagnation in the economy, there by retarding growth and development.

The monetary authority however, must attempt to keep the money supply growing at a rate to ensure sustainable economy growth and maintain internal and external stability. The discretionary control of the money whether cheap or expensive is depending on the prevailing, economic conditions thrust of policies.

In other words, the aims of monetary policy are basically to control inflation, maintain a steady balance of payments position to safeguard the external value of the national currency and promote adequate and sustainable level of economy growth and development, reduce vicious cycle of poverty and maintain price stability.

1.2     Statement of the Problem

The prevailing economic problem in Nigeria were inflation, unemployment, capacity under-utilization, BOP disequilibrium, inconsistent growth level in the economy are continual, in spite of claims of regulating the economy by the relevant government authority, leaves more dust as to the efficiency of the various monetary policy measures and the competence of economic planners.

In view of the above, the economic watcher and the interested public are losing faith in the monetary policy options in Nigeria over the years.

The questions in the minds of Nigeria is whether the continued disequilibrium state in the Nigerians economy is being controlled at all or left to chance by the relevant authorities.

1.3     Research Question

The research question this study will observe are -:

·        Does the efficacy of monetary policy determine economy growth in Nigeria?

·        To what extent does monetary policy affect domestic investment in Nigeria?

·        What are the problems inhabiting the monetary policy in Nigeria.

1.4     Objectives of the Study

The broad objective of the study is the appraisal of the impact of monetary policy on price stability in the Nigeria economy. However, specifically, the objectives also intends:

·        To appraise the efficacy of monetary policy in causing economic growth in Nigeria.

·        To evaluate the implication of monetary policy on Domestic Investment (DI) in Nigeria.

·        To unearth the problems inhabiting the efficacy of monetary policy in Nigeria.

1.5     Significance of the study

The findings of the study will be relevance to the following

·        Economic Planners: The study will provide empirical evidence of growth pattern of the Nigeria economy centered by monetary policy, which is essential for policy simulation purpose.

·        Economic Watchers: Results from this research work will provide an insight about the performance of monetary policy in stimulating domestic investment in Nigeria.

·        Researchers/ Students: The results of the study will serve as a means for further inquiry in this field or related other fields.

In summary, the research study findings would also be of use to anyone who is concern about the efficacy of monetary policy on price stability, its structures and administration, and why various monetary policies have not been successful in Nigeria.

1.6     Scope of the Study

This research work examined the role of monetary policy on price stability in Nigeria. It is limited to a period ranging from 1991-2007. The study covered the performance of the economy at large; this would enhance an accurate analysis of monetary policy within the economy. Emphasis was laid on the data analysis even though reference may be made to events outside the stimulated time range but limited to the aforesaid period. The focus of the work is also on effective control of excess liquidity or cash in the economy.

1.7     Limitation of the Study

The study is limited by the contradiction surrounding the relevant data as recorded by the relevant government institutions (CBN, National Bureau of Statistics, etc) Also, the study is limited by time and cost: The rising cost of transportation, stationery, clerical work, and the short time frame for the submission of this research work, also contributed a huge limitation to this study.

1.8     Definition of Terms.

The followings are the definitions and technical terms used in the course of this study.

·        Policy Instrument: The variables, which the authorities can adjust directly in order to achieve targets. An example of such variables includes the instruments of open market operations, discount rate, bank rate etc.

·        Intermediate target: These are the variables which often serve as the purpose of being the channel through which the instruments have effect on targets. Examples are interest, money supply etc.

·        Monetary Basel High powered money: Comprises certain a liability of the central bank of Nigeria (CBN) includes the total bank reserves and currency with non-bank public. The main sources of the monetary base are net foreign assets of CBN, net claims on government claims on commercial and merchant banks and other assets (net) of the CBN.

·        Interest rates: It is also known as interest rate structure. Interest rate differs from bank to bank as it have been largely deregulated every banks has interest rates for its ordinary fixed depositors, savers as well as prime lending rate which is offered to its first class customers while a maximum lending rate charged to its other customers.

More so, there exists an inter-bank rate, which applies to very short term loan transactions among the banks themselves.

The Rediscounts rate is the minimum rate at which the CBN as set aside to lend to the merchant banks and commercial bank either in direct loans or in the form of bill rediscounting

·        Price stability: the prime objective of monetary policy in Nigeria is the moderation of interest rate. To achieve this, the price levels needs to be stabilized. The policy of price stability is as a result of fluctuations in the prices of goods which bring uncertainties and instability into the economy.

However a stable price helps in reducing inequalities of income and wealth, which brings about economic stability, eliminates cyclical fluctuations, secure social justice and permits economic welfare.

References

Ogwuma, O.T (1997), “An Effective Monetary Policy in Nation Building”: (CBN

Billion, Volume 2, No.3)

Odekunle, A.A (2004), “Essential of Banking and Monetary systems in Nigeria”; (Okota, Lagos. Jaytees Publishers) pp240-229.

Fisher, LA (1976) “Monetary Policy”; London :Macmillan Publishers Ltd) pp402-410

Ayodele A.O (2008), The Nigerian Banking and Financial Environment”; (Ibadan

Immaculate Press) pp86-120.

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Full Project – MONETARY POLICY AS A TOOL OF ACHIEVING PRICE STABILITY IN THE NIGERIA ECONOMY