ABSTRACT
This study is
about monetary policy as price stabilization instrument of the economy. In
carrying out this research a total of 30 questionnaires were administered on
some banks. The responses from the respondents were coded and analyzed using
chi-square techniques. The findings reveal that the Central Bank Monetary
policy affects directly or indirectly a stabilizing effect in the following
areas.
i.
Price of commodity
ii.
Exchange rate
iii.
Rate of inflation in the economy. On the basis of
the above finding, recommendations were made.
TABLE OF CONTENTS
Title Page
Certification
Dedication
Acknowledgement
Abstract
Table of
contents
Chapter One
1.0 Introduction
1.1 Background of Study
1.2 Statement of problems
1.3 Objectives of study
1.4 Research Question
1.5 Formulation of Hypothesis
1.6 Scope of the Study
1.7 Significance of Study
1.8 Definition of Terms
1.9 Background Information on the Case Study
Chapter Two
2.0 Introduction
2.1 Theoretical Review
2.2 Objective of Monetary Policy
2.3 Effectiveness of Monetary Policy as a
Stabilization tools
2.4 Instruments or tools of Monetary Policy
2.5 Enumerated problems of Monetary Policy
2.6 Monetary Policy and the Nigerian Economy
Chapter Three
3.0 Introduction
3.1 Research Design
3.2 Population of the study
3.3 Data Collection Method
3.4 Instrument of Study
3.5 Determination of Sample Size
3.6 Reliability of Instrument
3.7 Validity of Instrument
3.8 Method of Analysis
Chapter Four
4.0 Introduction
4.1 Data Analysis
4.2 Hypothesis Testing and Interpretation
Chapter Five
5.0 Introduction
5.1 Summary of major Finding
5.2 Conclusion
5.3 Recommendation
5.4 Results
5.5 Implications
5.6 Suggestions for further Research
References
CHAPTER ONE
1.0 INTRODUCTION
According to the
stallion, a quarterly publication of union bank of Nigeria Plc, (anniversary
edition 1998).The earliest support for establishment of the central bank of
Nigeria goes back to the period of the banking failures of’ the early 1950’s
following which the power of control of banking was vested on the financial
secretary. Many Nationalists’ leaders at that time urged for the creation of a
central bank of perform this and other traditional functions which includes the
following:
1. Float, buy and sell Government bonds and
securities.
2. To act as lender
of idle resources to banks for who, the bank would also maintain reserves.
3. To acts as financial agent for the
government.
4. Acts as a
monetary authority to promote price and economic stability,
5. To undertake currency production.
However, the
ordinance for the establishment of the Central Bann
of Nigeria (CBN) was passed by the House of Assembly on 17th March, 1958 and was brought
partially into force in 15”‘ September when those sanctions necessary for
carrying out the initial function become law. The Act was fully implemented on
1Ist July 1959 when the Central Bank of Nigeria came into full operation.
The following are the main provision of the Central -Bank Act.
a) Bankers to other banks in Nigeria.
b) Banks and financial advisor to the Federal
Government.
c) Maintenance of
external reserves in order to safeguard the international value of currency.
d) Implementation
of monetary policies to promote monetary stability and a sound financial structure.
e) Issuance of legal tender currency in Nigeria.
1.1 BACKGROUND
TO THE STUDY.
As it is clearly
stated in the. Bank Act listed above, one of the principle objectives in
function of the Central Bank is to promote monetary stability and soundness in
the financial system by implementing monetary policies
Thus, monetary
policy may be said to be the combination of measure designed to regulate the
value, supply and cost of money in an economy in consonance with the level of
economic activity.
There are two
major techniques through which monetary policy try to achieve its objectives.
These are the direct in portfolio control approach and indirect market
intervention approach.
The Direct
control approach was introduced in the early 1960’s while the use of indirect
control started in the early 1960’s, in1993 to be precise with the commencement
of the open Market Operation (OMO). As pointed by Scitouslky (1969), money is a
difficult concept to define, partly because it fulfils not one but three
functions, each of them providing a criterion of money ness, those of a unit of
account, a medium of exchange and a store of value. Therefore, he defines money
as a commodity that serve as a means of valuation and of payment Le as both the
unit of account and the generally acceptable medium of exchange. Thus beside
legality, there are other determinants which go to makes a thing to serve as
money.
Money is unique
among economic goods and it is the principle of general acceptability that
distinguishes it from other commodities in a modern economy.
With the
introduction of money in determining the value of goods and services, the
difficulties in trade by barter has been eliminated and trade made very easy.
During the barter period, value of a commodity differs from one hand to the
other depending in the provider of a commodity to the person in need of it.
Today value is placed on items only requiring money to be paid in exchange.
Adewunmi (1996)
defined price as the value attached to a particular commodity, can be described
as its price. The value of a commodity is the amount of money, which can be
exchanged for that commodity. In other words, the values of different
commodities are shown by their prices in terms of money. The value of money
therefore can be seen indirectly through the prices of goods and services.
Suppose a given quantity of commodity cost #8.00 at one period and #10.00 at a
later period, the different in prices of the two later periods, indicate that
there is a decline in the value of money. The indicator of the value of money
is thus, the general price level. A general fall in prices of commodities
indicates an increase in the value of money while a general rise in prices show
a decrease in the value of money.
A persistence
change in price level is a characteristic of an Unstable economy. Hence an
unstable economy can be said to be one that is suffering from pervasive
inflation. One of the consequences of inflation in the economy is monetary
breakdown as a money is losing its vale very rapidly.
This type of
situation causes money to cease to function as a standard for different payment
and acts as a store of value. There is therefore a need for an instrument to
stabilize the value of money.
To keep the
value of money stable, its quantity has to be controlled.
Monetary policy
is the instrument designed to control the quantity of money in the economy.
Erizing (1972)
define monetary policies as all decision and measures to influence the value of
price of quantity of money and also monetary irrespective of whether their aims
or objectives are monetary or non monetary and aimed at affecting the monetary
system? This include policy measures which are by no means monetary.
The definition
however is too wide to clearly understand the scope of monetary policy. A more
precise definition exists in Johnson view; He says “Monetary policy is that
policy employed, by Central Bank to control the supply and cost of money as
instrument for achieving the objectives of the general economic policy. Another
precise definition is that of Edward Scinpio who defined monetary policy as:
the exercise of Central Bank control over money supply as a means of achieving
price stability,’ rapid growth, full employment and balance in payment
equilibrium.
From the above
definitions, one can see that monetary policy is mainly concerned with deciding
how much money the economy shall have in perhaps more correctly, deciding
whether to increase or decrease the volume of purchasing power in the country
if the quantity of money is deemed insufficient to keep up demand to a level
that will give full employment, on inflationary policy will be adopted, that is
steps will be taken to increase the quantity of money, if on the other hand it
is decided to reduce the quantity of money because the demand for both
commodities and labors exceeds the available supply, the deflationary policy
will have to be followed in other to check an excessive rise in price.
Monetary policy
are designed and implemented by monetary activities. In Nigeria, the
monetary authorities consist of the presidency, the Central Bank of Nigeria and the
Federal Ministry of Finance. The Central Bank of Nigeria is the Federal Ministry of
Finance. The Central Bank of Nigeria
is the agency, which is primarily responsible for designing monetary policy
proposals for presidential approval and ensuring the implementation of the
monetary policy measure accepted by the Federal Government. This is the most
important activity of the Central Bank of Nigeria.
1.2 STATEMENT
OF PROBLEMS
The problem
inherit in this study is to determine how monetary policy instrument can be
used to stabilize price in the economy. This is because over the years, there
has been upward swing and download swing of prices in the economy, which has
tremendously, led to fluctuation and instability in the economy.
Therefore, the
statement of problem is to determine price stability in the economy through the
use of various economy monetary policy instruments such as OMO (Open Market
Operation), Bank Rate, Reserve Ratio, Credit selection and Banks
Recapitalization etc.
1.3 OBJECTIVE
OF STUDY
The main
objective of this study, monetary policies as price stabilization instruments
are:
a) To identify the
major problems of implementing monetary policy efficiently.
b) To identify the
effects of monetary policy in prices of goods and services in Nigeria, and
how it influences the rate of inflation.
c) To review the
evolution or establishment of power of the central bank of Nigeria in regards
to monetary policy.
d) To identify the basic monetary policies in Nigeria.
e) To identify how
monetary policy are formulated and implemented or executed by the monetary
authorities.
1.4 RESEARCH
QUESTIONS/HYPOTHESIS
1. What is the
problem of implementing the monetary policy efficiently?
2. What is the
effect of monetary policies in prices of goods and services in Nigeria?
3. How efficient is
the establishment of power of the Central Bank of Nigeria in regards to monetary
policies?
4. Identify the basic monetary polices in Nigeria.
5. Why is monetary
policy formulated and implemented by monetary authorities?
FORMULATION OF HYPOTHESIS
Hypothesis I
H0: The
yearly monetary policy guidelines are used to stabilize the general price of
commodities.
H1: The
yearly monetary policy guidelines are not used to stabilize the price of
commodities.
Hypothesis 2
H0: Money
supply has an effect on the rate of inflation in Nigeria.
H1: Money
supply has no effect on the rate of inflation in Nigeria.
1.5 SCOPE
OF STUDY
The scope of
this study which is about the effect of monetary policy in the general price
level of commodities in the economy. I n order to accomplish the objective of
this research work, the researcher will focus in various monetary policies in
the banking sector with reference to Union Bank of Nigeria P1c.
According to the
monetary policy guideline of the Central Bank of Nigeria.
1.6 SIGNIFICANCE
OF STUDY
The study will
provide exploitation and reason for Monetary policy in price stabilization. And
will offer suggestions, which will avoid or minimize financial distress that
may occur as a result of multiple construction of money supply. This study will
reveal the determination of the bank’s solvency. And reveal the relationship
between money supply and price.
1.7 DEFINITION
OF TERMS
Some terms will
be commonly used in the course of writing this project. These terms are:
a. Treasury Certificate: This is also
money market instrument being used to borrow for a period of 12 to 26 months.
b. Stabilization Securities: These are
issued to banks, commercial banks to create money through lending activities.
c. Monetary Policies: These are used as a
stabilization tool to check fluctuation in the level of economic activity.
1.8 BACKGROUND
INFORMATION ON THE CASE STUDY
The Central Bank
of Nigeria
was established partially on the
17th March, 1958 and was brought partially into force
operation on 15th September when those sections necessary for carrying out the
initial functions became law. The Act was fully implemented on 1st July, 1959 when the
Central Bank of Nigeria
came into full operation. The following are the main provision of the Central
Bank Act:
1. Financial advisor to the Federal
Government.
2. Bankers to other banks in Nigeria.
3. Implementation
of monetary policies to promote monetary stability and sound structure.
4. Issuance of legal tender currency in Nigeria.
5. Maintenance of external reserves.
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